SEVEN HILLS REAL(SEVN) - 2025 Q2 - Quarterly Report

PART I Financial Information Financial Statements (unaudited) The company's unaudited financial statements show total assets of $687.4 million and a net income of $2.7 million for the quarter ended June 30, 2025 Condensed Consolidated Balance Sheets (unaudited) | (in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $687,383 | $692,808 | | Loans held for investment, net | $621,943 | $601,842 | | Cash and cash equivalents | $45,951 | $70,750 | | Total Liabilities | $420,363 | $423,530 | | Secured financing facilities, net | $415,999 | $417,796 | | Total Shareholders' Equity | $267,020 | $269,278 | Condensed Consolidated Statements of Operations (unaudited) | (in thousands, except per share) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $7,393 | $9,380 | $14,987 | $18,742 | | Net income | $2,678 | $4,229 | $7,210 | $9,462 | | Net income per common share - basic and diluted | $0.18 | $0.28 | $0.48 | $0.64 | Condensed Consolidated Statements of Cash Flows (unaudited) | (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,663 | $8,969 | | Net cash (used in) provided by investing activities | ($20,421) | $20,415 | | Net cash used in financing activities | ($13,041) | ($47,636) | | Decrease in cash and cash equivalents | ($24,799) | ($18,252) | | Cash and cash equivalents at end of period | $45,951 | $69,603 | Notes to Unaudited Condensed Consolidated Financial Statements Detailed notes support the financial statements, covering the loan portfolio, credit loss allowance, and financing facilities Loan Portfolio Statistics | | As of June 30, 2025 | As of December 31, 2024 | | :--- | :--- | :--- | | Number of loans | 23 | 21 | | Total loan commitments | $665,421 | $641,213 | | Principal balance | $632,826 | $610,811 | | Carrying value | $621,943 | $601,842 | | Weighted average coupon rate | 8.03% | 8.24% | | Weighted average risk rating | 2.9 | 3.1 | Allowance for Credit Losses Activity (Six Months Ended June 30, 2025) | (in thousands) | Loans Held for Investment, net | Unfunded Loan Commitments | Total | | :--- | :--- | :--- | :--- | | Balance at Dec 31, 2024 | $8,074 | $834 | $8,908 | | Provision for (reversal of) credit losses | $1,301 | ($542) | $759 | | Balance at June 30, 2025 | $9,375 | $292 | $9,667 | - The increase in the allowance for credit losses during the first six months of 2025 was primarily due to unfavorable CRE pricing forecasts and loan extensions, partially offset by loan repayments[36] Secured Financing Facilities Summary (as of June 30, 2025) | (in thousands) | Maximum Facility Size | Principal Balance | Carrying Value | | :--- | :--- | :--- | :--- | | UBS Master Repurchase Facility | $250,000 | $156,929 | $156,663 | | Citibank Master Repurchase Facility | $215,000 | $108,113 | $107,642 | | BMO Facility | $150,000 | $72,205 | $72,065 | | Wells Fargo Master Repurchase Facility | $125,000 | $79,968 | $79,629 | | Total | $740,000 | $417,215 | $415,999 | - For the six months ended June 30, 2025, the company declared and paid distributions of $0.70 per common share, totaling $10.4 million[60] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses its transitional CRE lending strategy, performance drivers, and financial results, including non-GAAP reconciliations Overview and Factors Affecting Operating Results The company operates as a REIT focused on floating-rate first mortgage loans for transitional CRE, influenced by credit and interest rate risks - The business strategy is focused on originating and investing in floating rate first mortgage loans ranging from $15,000 to $75,000, secured by middle market transitional CRE properties[74] - Key factors affecting operating results include credit risk, availability of leverage, market conditions, changes in interest rates, portfolio size, and prepayment risk[77][78][80] - As of June 30, 2025, SOFR was 4.32%, resulting in one loan investment having an active interest rate floor, and the company's net interest income generally increases as benchmark rates rise[85] Our Loan Portfolio The loan portfolio grew to 23 first mortgage loans totaling $632.8 million, with all borrowers current on debt service payments Loan Portfolio Overview | | As of June 30, 2025 | As of December 31, 2024 | | :--- | :--- | :--- | | Number of loans | 23 | 21 | | Principal balance | $632,826 | $610,811 | | Weighted average all in yield | 8.37% | 8.62% | | Weighted average risk rating | 2.9 | 3.1 | | Weighted average LTV | 68% | 67% | - As of June 30, 2025, the company had five loans with a risk rating of '4' or 'higher risk', representing approximately 22% of the amortized cost of the loan portfolio, with no '5' or 'loss likely' rated loans[92] - All borrowers had paid their debt service obligations owed and due as of June 30, 2025, and July 24, 2025, and the company had no outstanding past due or nonaccrual loans[98][99] Financing Activities The company utilizes four secured financing facilities totaling $740 million, with $417.2 million outstanding as of June 30, 2025 Secured Financing Facilities Overview (as of June 30, 2025) | (in thousands) | Principal Balance | Unused Capacity | Maximum Facility Size | | :--- | :--- | :--- | :--- | | Total | $417,215 | $322,785 | $740,000 | Secured Financing Facilities Activity (Q2 2025) | (in thousands) | Amount | | :--- | :--- | | Balance at March 31, 2025 | $440,474 | | Borrowings | $31,900 | | Repayments | ($56,711) | | Balance at June 30, 2025 | $415,999 | Results of Operations Net income decreased to $2.7 million in Q2 2025 and $7.2 million for H1 2025, driven by lower interest income and credit loss provisions Q2 2025 vs. Q1 2025 Performance | (in thousands, except per share) | Q2 2025 | Q1 2025 | Change | | :--- | :--- | :--- | :--- | | Net income | $2,678 | $4,532 | ($1,854) | | Net income per share | $0.18 | $0.30 | ($0.12) | - The decrease in net income from Q1 to Q2 2025 was mainly driven by a $1.1 million negative swing in the provision for credit losses and a $0.4 million increase in G&A expenses[104][109][108] H1 2025 vs. H1 2024 Performance | (in thousands, except per share) | H1 2025 | H1 2024 | Change | | :--- | :--- | :--- | :--- | | Net income | $7,210 | $9,462 | ($2,252) | | Net income per share | $0.48 | $0.64 | ($0.16) | - The YoY decrease in H1 2025 net income was primarily due to a $4.0 million decrease in interest and related income and the absence of a $1.9 million purchase discount accretion[113][114][120] Non-GAAP Financial Measures The company reports non-GAAP measures, including an Adjusted Book Value of $18.51 per share and Distributable Earnings of $0.31 per share Adjusted Book Value per Common Share | | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Book value per common share | $17.87 | $18.07 | | Allowance for credit losses per common share | $0.64 | $0.60 | | Adjusted Book Value per common share | $18.51 | $18.67 | Reconciliation of Net Income to Distributable Earnings (Q2 2025) | (in thousands, except per share) | Amount | | :--- | :--- | | Net income | $2,678 | | Non-cash equity compensation expense | $677 | | Provision for credit losses | $912 | | Depreciation and amortization of REO | $269 | | Distributable Earnings | $4,536 | | Net income per share | $0.18 | | Distributable Earnings per share | $0.31 | Liquidity and Capital Resources The company maintains sufficient liquidity through cash and financing facilities to meet obligations for the next 12 months - The company believes its sources of funds will be sufficient to meet operating expenses, debt service, and distributions for the next 12 months[130] - On July 10, 2025, the company declared a reduced regular quarterly distribution of $0.28 per common share, down from $0.35, reflecting expectations of lower future net interest margins[137] Contractual Obligations and Commitments (as of June 30, 2025) | (in thousands) | Total | Less than 1 Year | 1 - 3 Years | | :--- | :--- | :--- | :--- | | Unfunded loan commitments | $32,595 | $9,638 | $22,957 | | Principal payments on Secured Financing Facilities | $417,215 | $293,013 | $124,202 | | Interest payments on Secured Financing Facilities | $19,105 | $16,562 | $2,543 | | Total | $469,057 | $319,355 | $149,702 | Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the current reporting period - Not applicable[152] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls during the quarter - Management, including the Managing Trustees, President, and CFO, concluded that the company's disclosure controls and procedures are effective as of the end of the period covered by the report[153] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2025, that have materially affected, or are reasonably likely to materially affect, internal controls[154] PART II Other Information Risk Factors There have been no material changes to the risk factors previously disclosed in the 2024 Annual Report - There have been no material changes to the risk factors previously disclosed in our 2024 Annual Report[163] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 5,234 common shares during the quarter to satisfy employee tax withholding obligations Issuer Purchases of Equity Securities (Quarter Ended June 30, 2025) | Calendar Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2025 | 1,376 | $13.00 | | May 2025 | 3,858 | $11.73 | | Total/weighted average | 5,234 | $12.06 | - The share purchases were made to satisfy tax withholding and payment obligations of certain current and former officers and employees of Tremont and/or RMR related to the vesting of share awards[165] Exhibits This section lists all exhibits filed with the report, including governance documents and required certifications - The report includes a list of filed exhibits, such as corporate governance documents, equity compensation plans, and required CEO/CFO certifications[166]