SEVEN HILLS REAL(SEVN) - 2025 Q4 - Annual Report

Real Estate Management - As of December 31, 2025, RMR Inc. managed over $37 billion in real estate assets across approximately 1,800 properties[41]. - Tremont's relationship with RMR provides access to a broad network of real estate professionals, enhancing investment opportunities[42]. REIT Compliance and Taxation - The company must distribute at least 90% of its annual REIT taxable income to maintain its REIT status, limiting cash retention for loan originations[33]. - The company has elected to be taxed as a REIT since its 2020 taxable year, ensuring compliance with applicable qualification tests[60]. - The company is organized and qualified for taxation as a REIT under the IRC for the taxable years 2020 through 2025[62]. - The company believes it has satisfied the REIT qualification tests and will continue to do so in the future[66]. - If the company fails to qualify as a REIT, it could face significant tax liabilities, reducing cash available for shareholder distributions[66]. - The company may be subject to a 4% nondeductible excise tax if it fails to distribute at least 85% of its REIT ordinary income and 95% of its REIT capital gain net income[67]. - The company has no outstanding preferred shares, and distributions are allocated first to common shares[61]. - The company may be subject to federal corporate income tax on undistributed REIT taxable income[67]. - The company’s subsidiaries that are C corporations will be required to pay federal corporate income tax on their earnings[68]. - The company believes it has met all conditions required for REIT qualification during the requisite periods[73]. - The company has complied with Treasury regulations regarding share ownership and will continue to do so by annually requesting information from significant shareholders[75]. - The company believes that all its direct and indirect wholly owned subsidiaries will qualify as REIT subsidiaries, treating their assets and liabilities as part of the REIT[78]. - The company is permitted to own up to 20% of its total assets in taxable REIT subsidiaries (TRSs), increasing to 25% after December 31, 2025[80]. Income and Asset Tests - The company must satisfy two gross income tests annually: at least 75% of gross income must derive from real property investments, and at least 95% must consist of qualifying income[85]. - Interest income from loans secured by real property will generally qualify for the 75% gross income test, provided it meets certain conditions[86]. - The company expects that income from CMBS and agency securities will qualify for both the 75% and 95% gross income tests[88]. - Mezzanine loans may be treated as real estate assets for tax purposes if they meet specified safe harbor requirements, allowing interest to qualify for the 75% income test[89]. - The company expects mezzanine loans to generally be treated as debt for federal income tax purposes, while preferred equity investments are expected to be treated as equity[90]. - The company anticipates that interest from participation interests in mortgage loans and mezzanine loans will generally qualify as income for both the 75% and 95% gross income tests[91]. - Fee income from loans originated by the company, including prepayment penalties and late payment charges, is expected to qualify as income for both the 75% and 95% gross income tests[92]. - Rental income from properties acquired through foreclosure is expected to satisfy the 75% and 95% gross income tests if existing or new tenants pay qualifying rents[94]. - The company believes that all or substantially all rents and related service charges received will qualify as "rents from real property" for the 75% and 95% gross income tests[102]. - Gains from the sale of foreclosure property will be qualifying income for the 75% and 95% gross income tests and exempt from the 100% tax on gains from prohibited transactions[96]. - The company must satisfy asset percentage tests, including that at least 75% of total assets consist of "real estate assets" to qualify for taxation as a REIT[105]. - Not more than 25% of total assets may be represented by securities other than those that count favorably toward the 75% asset test[105]. - The company’s investments in the equity or debt of a TRS are expected to be treated as real estate assets for REIT asset tests[106]. - The company intends to structure activities to avoid prohibited transactions and may utilize TRSs to mitigate potential tax implications[103]. - The company believes it has satisfied the REIT asset tests and will continue to do so, beginning with its first taxable year as a REIT[114]. Distribution Requirements - The company is required to make annual distributions equal to at least 90% of its "real estate investment trust taxable income" to qualify for taxation as a REIT[116]. - If the company fails the 5% asset test, the 10% vote test, or the 10% value test, it has a 30-day period to cure the failure, or it may be excused if the failure is de minimis[111]. - The company expects its income to predominantly consist of business interest income, which should exceed its net interest expense, thus not triggering interest deduction limitations[115]. - The company may face timing differences between cash receipts and income recognition, potentially leading to substantial taxable income without sufficient cash for distributions[120]. - The company may pay "deficiency dividends" in later years to rectify any failure to meet distribution requirements, which would incur an interest charge for the delay[121]. - The company may elect to retain some or all of its net capital gain and pay income tax on those retained amounts, affecting shareholders' tax basis[122]. Tax Implications for Shareholders - The maximum federal income tax rate for long-term capital gains and most corporate dividends for noncorporate U.S. shareholders is generally 15% if their total adjusted income does not exceed applicable thresholds, and 20% if it exceeds those thresholds[126]. - Ordinary dividends are generally taxed at higher federal income tax rates applicable to ordinary income, except for qualified REIT dividends which may benefit from lower effective tax rates[126]. - Distributions made out of current or accumulated earnings and profits that are designated as capital gain dividends will be taxed as long-term capital gains, provided they do not exceed the actual net capital gain for the taxable year[127]. - Non-U.S. shareholders will generally be subject to U.S. federal income tax and withholding at a rate of 30% on distributions that are not designated as capital gain dividends[142]. - Non-U.S. shareholders may seek a refund from the IRS for amounts withheld on distributions in excess of their allocable share of current and accumulated earnings and profits[142]. - If a class of shares is not listed on a U.S. national securities exchange, distributions attributable to gain from the sale of U.S. real property interests may be taxed as if they were effectively connected with a U.S. trade or business[146]. - Tax treaties may reduce withholding obligations on distributions, but rates below 30% may not apply to ordinary income dividends from a REIT unless specified conditions are met[145]. - Noncorporate U.S. shareholders who borrow funds to finance their acquisition of shares may be limited in the amount of deductions allowed for interest paid on the indebtedness incurred[135]. - Each U.S. shareholder will be taxed on its designated proportionate share of retained net capital gains as though that amount were distributed and designated as a capital gain dividend[136]. - Tax-exempt shareholders receiving distributions from the company should not have such amounts treated as UBTI, provided certain conditions are met[138]. - The company believes its shares will not constitute USRPIs, as it does not meet the criteria of being a "United States real property holding corporation" based on asset value assessments[149]. - The company expects to maintain its status as a "domestically controlled" REIT, with less than 50% of its shares held by non-U.S. shareholders over the past five years[150]. - Distributions to non-U.S. shareholders will be reported to both the shareholders and the IRS, regardless of withholding status[154]. - Non-U.S. financial institutions must comply with diligence and reporting requirements to avoid a 30% U.S. withholding tax on applicable payments[156]. Shareholder and Securities Regulations - The company is not an investment company registered under the 1940 Act, and its shares must be analyzed to determine if they are publicly offered securities[164]. - The company believes its common shares have been and will remain widely held, which is essential for maintaining their status as publicly offered securities[165]. - The company does not expect to impose restrictions on the transfer of shares that would affect their classification as "freely transferable"[167]. - Tax counsel has opined that the company's shares are publicly offered and will not be deemed "plan assets" of any ERISA Plan or Non-ERISA Plan acquiring shares in a public offering[168].