Yahoo Finance Seven Hills Realty Trust (NASDAQ:SEVN) Q1 2024 Earnings Call Transcript
Seven Hills Realty Trust (NASDAQ:SEVN) Q1 2024 Earnings Call Transcript April 30, 2024
Seven Hills Realty Trust isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Seven Hills Realty Trust First Quarter 2024 Financial Results Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the call over to Stephen Colbert, Director of Investor Relations. Please go ahead.
Stephen Colbert: Good morning. Joining me on today's call are Tom Lorenzini, President and Chief Investment Officer; and Fernando Diaz, Chief Financial Officer and Treasurer. Today's call includes a presentation by management, followed by a question-and-answer session with analysts. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on Seven Hills' beliefs and expectations as of today, April 30, 2024, and actual results may differ materially from those that we project.
The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, or SEC, which can be accessed from the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP financial numbers during this call, including distributable earnings and distributable earnings per share. A reconciliation of GAAP to non-GAAP financial measures can be found in our earnings release presentation, which can be found on our website at sevnreit.com.
And with that, I will turn the call over to Tom.
Tom Lorenzini: Thanks, Stephen. Good morning, everyone, and thank you for joining our call today. Last night, we reported strong first quarter results highlighted by distributable earnings per share that were above the high end of our guidance range. The continued strength and stability of Seven Hills' investment portfolio once again helped to deliver positive total shareholder returns that exceeded our NAREIT industry benchmark for the quarter. We believe this ongoing outperformance serves as a testament to the strength of our loan book and our disciplined underwriting, originations and asset management teams. With ample liquidity on hand, we look forward to continuing to build on our momentum throughout 2024. Turning to a few highlights from the first quarter.
We delivered distributable earnings per share of $0.38, exceeding our $0.35 per share of quarterly dividend by 9%. The credit profile of our loan portfolio remained stable with an overall average risk rating of three with no loans in default and no nonaccrual loans. We received over $40 million of loan payoffs, demonstrating the continued ability of our well-capitalized sponsors to execute on their business plans in today's market. And we delivered total shareholder return that outperformed the industry benchmark by more than 7 percentage points, equating to cumulative outperformance of more than 60% since the beginning of 2022. From a macro perspective, the U.S. economy has remained resilient amid a backdrop of relatively strong economic data and inflation readings above the Federal Reserve's comfort level.
As a result, expectations for interest rate cuts have shifted and are now weighted towards the back half of this year. While we believe that lower interest rates will ultimately create a more favorable environment for real estate transactions and result in increased lending opportunities, we are confident our current production pipeline provide a steady flow of attractive investment opportunities to further expand our loan book this year. Turning to our first quarter portfolio activity. Our conservatively underwritten portfolio continues to experience repayments across various property types. During the quarter, we received three loan payoffs, including one office, one retail and one industrial property for a total of $40.4 million. We did not close on any new loans during the first quarter, which is traditionally a slower period of the year.
Post quarter end, however, on April 25, we closed a multifamily loan with a total commitment of $17.8 million with a coupon SOFR plus 315 basis points for an all-in yield of 9% when including loan fees. Turning to our loan book as of March 31. Seven Hills portfolio remains 100% invested in floating rate loans and consisted of 21 first mortgages with an average loan size of $30 million and total commitments of nearly $630 million, down approximately 6% or $40 million from last quarter, while future fundings remain consistent at only about 6% of our total commitments. Our investments have a weighted average coupon of 9.1% and an all-in yield of 9.6%. In aggregate, the portfolio has a weighted average maximum maturity of 2.8 years when including extension options and a stable overall credit profile with an average risk rating of three and a loan-to-value at close of 68%.
We continue to make progress diversifying our loan book. As of quarter end, multifamily was our largest property type at 35%. Our office exposure has declined to 28% compared to 40% a year ago. And the balance of our portfolio is comprised of retail, hospitality, self-storage and industrial loans. In terms of portfolio vintage, after the repayments we received during the first quarter, Seven Hills portfolio now consists entirely of loans that were originated subsequent to the onset of the pandemic. From a capital perspective, our lending partners remain very supportive of our business. In aggregate, our four secured financing facilities provide us with nearly $700 million in borrowing capacity. And we had a weighted average borrowing rate of SOFR plus 218 basis points at the end of the quarter.
Turning to our active deal pipeline. We continue to see a steady flow of deals of over $600 million of prospective lending opportunities in various stages of our screening and diligence process consisting of acquisition and refinancing requests for industrial, multifamily, self-storage, retail and hospitality properties, including one loan for $23.8 million currently under application and in diligence and expected to close within the next 45 days. In closing, our portfolio and overall credit performance remains strong and our business continues to deliver solid results. While interest rates are likely to remain higher for longer, we believe we are well positioned to accelerate loan production this year, selecting the most compelling investment opportunities for our portfolio and continue to generate attractive returns for our shareholders.
With that, I will now turn the call over to Fernando.
Fernando Diaz: Thank you, Tom, and good morning. Yesterday afternoon, we reported first quarter 2024 Distributable Earnings, or DE, of $5.6 million or $0.38 per share, which was $0.01 above the high end of our guidance range, primarily due to the timing of loan repayments during the quarter. Our run rate earnings over the last few quarters have comfortably exceeded our dividend level. In mid-April, we declared our regular quarterly dividend to shareholders of $0.35 per share payable on May 16, which our first quarter DE covered by approximately 109%. On an annualized basis, our dividend equates to a yield of approximately 11% based on yesterday's closing stock price. Our CECL reserve remains modest at 100 basis points of our total loan commitments as of March 31.
And all loans remain current on debt service, and we have no nonaccrual loans. We remain focused on further diversifying our portfolio into real estate sectors with fundamentals we deem to be more attractive and have reduced our office exposure to 28% as of quarter end compared to 40% in the first quarter of 2023. As a reminder, to help protect us against investment losses, we structure all of our loans with risk mitigation mechanisms such as cash flow sweeps, interest reserves and rebalancing requirements. And we do not have any collateral-dependent loans or loans with specific reserves. In the first quarter, Seven Hills maintained its conservative leverage metrics and continues to have substantial liquidity. We ended the quarter with $93 million of cash on hand and $272 million of reinvestment capacity across our four secured financing facilities.
Total debt to equity decreased to 1.6x from 1.7x at the end of the previous quarter, primarily due to the three loan repayments that Tom discussed. We believe that our conservative leverage and available borrowing capacity provide a strong opportunity to originate accretive loans that will benefit the company going forward. Turning to our outlook and guidance for the second quarter. We expect distributable earnings to be within a range of $0.35 to $0.37 per share, which will continue to cover our quarterly dividend. This guidance reflects our recent origination and repayment activity and assumes flat G&A expenses and that interest rates will remain consistent with current levels. That concludes our prepared remarks. And with that, operator, please open the lines for questions.
Operator: [Operator Instructions] The first question comes from Matthew Erdner with JonesTrading. Please go ahead.
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