Prepared remarks
Good morning, and welcome to the 7 Hills Realty Trust Second Quarter 2026 Financial Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the call over to Matt Murphy, Manager of Investor Relations. Please go ahead, Matthew.
Good morning. Joining me on today's call are Tom Lorenzini, President and Chief Investment Officer; Matt Brown, Chief Financial Officer and Treasurer; and Jared Lewis, Vice President. Today's call includes a presentation by management followed by a question-and-answer session with analysts. Please note that 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 7 Hills' beliefs and expectations as of today, 07/29/2026, 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, 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 7reit.com. With that, I will now turn the call over to Tom.
Thank you, Matthew, and good morning, everyone. On our call today, I will begin with an overview of our second quarter activity and portfolio performance. Jared will then discuss market conditions and our investment pipeline before Matt reviews our financial results and outlook. The second quarter reflected continued progress for 7 Hills as we deployed capital raised through our rights offering while also strengthening our overall portfolio composition. During the quarter, we generated distributable earnings of $5.1 million, or $0.23 per share. Distributable earnings came in at the lower end of our guidance range primarily due to several loan closings occurring later in the quarter than initially expected. Despite these delays, we continue to make meaningful progress deploying our available capital, growing the portfolio, and remaining on pace to have a covered dividend by year end. Our second quarter investment activity reflects the strength of our origination platform and the flexibility provided by our balance sheet. We closed three new loans totaling $75 million, including a $36.3 million loan secured by a multifamily property in Roswell, Georgia; a $22.7 million loan secured by a medical office property in Sugar Land, Texas; and a $16 million loan secured by a self-storage facility in Philadelphia. Subsequent to quarter end, we also closed a $24.3 million loan secured by a retail property in Park City, Utah. Together, these four investments reflect our ability to source attractive opportunities across varying property types and geographies. As a result, we have grown our portfolio by approximately $606.5 million year to date to roughly $790 million today. The portfolio continues to perform well, with no realized losses, all borrowers current on debt service, and a weighted average all-in yield of approximately 7.7% at quarter end. Credit performance also remained stable during the quarter, with a weighted average risk rating of 2.9. More than 80% of our current portfolio has been originated since 2022, meaning the vast majority of our investments were underwritten in the post-pandemic environment and reflect current market conditions. Turning to Yardley, our sole REO property, the asset services team here at RMR has done a terrific job positioning the asset for an eventual sale. In addition to various lease renewals over the past 24 months, we recently signed one new lease and have another lease under letter of intent. As a result, the property is expected to achieve occupancy over 90%, well ahead of comparable properties in the market. Repayment activity during the quarter also enhanced the overall composition of our portfolio while providing flexibility to pursue new originations. We received over $85 million of repayments including a full repayment of a $54.7 million loan secured by a multifamily property in suburban Cleveland; a full repayment of a $26.5 million loan secured by an office building in suburban Chicago; and a $4 million partial repayment in conjunction with a one-year extension of a $37 million loan secured by a hotel in Boston. Following this repayment activity, we ended June with approximately $70 million of cash on hand and nearly $400 million of available capacity across our financing facilities. Importantly, our legacy office exposure has continued to trend downward from 24% at year-end to 19% today, and we expect this number to decrease even further with three office loans scheduled to mature later this year. The repayment of these relatively under-levered loans should also increase our capacity to grow the portfolio through new originations later in the year. Overall, 7 Hills enters the second half of the year from a position of strength, with reduced office exposure, a largely post-pandemic loan portfolio, and ample liquidity. Looking ahead, we remain focused on thoughtfully growing the portfolio and increasing earnings throughout the remainder of the year. With that, I will turn the call over to Jared to discuss current market conditions and our pipeline.
Thanks, Tom. Since our last earnings call, market activity has been influenced by a combination of geopolitical uncertainty and interest rate volatility. During the quarter, concerns surrounding the conflict with Iran, the potential impact of higher energy prices, and renewed inflationary pressures contributed to a meaningful increase in Treasury volatility, with interest rates ranging between 4% and 4.7%. As we have discussed previously, periods of Treasury rate volatility often create hesitation among commercial real estate investors as they contemplate buy and sell decisions. We saw evidence of that during April when transaction activity slowed noticeably as market participants took a cautious approach. However, activity accelerated as the quarter progressed through May and June. Against that backdrop, transaction activity today continues to be driven more by refinancings and acquisitions as lenders are increasingly requiring borrowers to repay maturing debt rather than extending. Additionally, many of these properties have not yet reached the level of stabilization needed to secure permanent financing or achieve optimal sale proceeds. Therefore, floating-rate financing remains an attractive option due to its lower borrowing costs and flexibility relative to longer-term fixed-rate debt. From a capital markets perspective, liquidity remains abundant. Banks have meaningfully re-entered the market as lenders, debt funds continue to compete aggressively for new lending opportunities, and the securitization market continues to be extremely active. These competitive dynamics have led to credit spreads tightening across many property types. Multifamily continues to be the most competitive segment of the market despite the fact that many of these assets and submarkets are still contending with elevated supply, slower absorption, and persistent rent concessions. While we continue to evaluate a large volume of multifamily opportunities, we remain selective at current pricing levels and instead have found some recent success in sectors such as retail, medical office, self-storage, industrial, and student housing, where we believe our returns are more compelling relative to the underlying risk profile. From a pipeline perspective, activity remains healthy. We continue to see a steady flow of financing requests across multiple property types. We currently have seven outstanding term sheets representing approximately $300 million of potential lending opportunities. This provides a strong foundation for continued portfolio growth as we move through the third quarter. While competition has increased, we remain focused on opportunities where pricing, structure, and sponsorship align with our underwriting standards. Borrowers continue to value financing partners that can provide certainty of execution, structural flexibility, and customized solutions as they navigate upcoming maturities and an uncertain macroeconomic backdrop. We believe this environment will continue to benefit floating-rate lenders like 7 Hills that can provide bespoke financing solutions for its borrowers. I will now turn the call over to Matthew to review our financial results and guidance.
Thank you, Jared, and good morning, everyone. Yesterday, we reported second quarter distributable earnings of $5.1 million, or $0.23 per share, which was at the low end of our guidance. As Tom mentioned, this was largely driven by delays in forecasted loan closings in the quarter. While deployment in the quarter was delayed from our assumptions, it is important to note that originations so far in 2026 have been executed at net interest margins of 1.86%, the highest level over the past four years. Earlier this month, our Board declared a regular quarterly dividend of $0.28 per share, which equates to an annualized yield of approximately 14% based on yesterday's closing price. While the rights offering has continued to impact distributable earnings, resulting in our dividend not being covered over the past two quarters, we remain committed to this dividend level through 2026 at a minimum and expect to cover our quarterly dividend level by the end of this year. Overall, we expect third quarter distributable earnings to be in the range of $0.23 to $0.25 per share. As we deploy our available capital toward third- and fourth-quarter targets, we expect the incremental earnings to offset the impact of the higher share count by year end. Credit quality remains strong at 7 Hills. Our CECL reserve stands at 190 basis points of total loan commitments, a 60-basis-point increase from last quarter. While all office loans are performing and our exposure has declined to 19%, the increase is largely driven by increased reserves on two of our office loans with 2026 maturities. Our full loan portfolio is supported by a conservative portfolio risk rating of 2.9. The portfolio is well diversified by property type and geography, and all loans are current on debt service. This reflects a disciplined underwriting and asset management process that we believe creates durable long-term value for our shareholders. That concludes our prepared remarks. Operator, please open the line for questions.
Questions and answers
We will now begin the question-and-answer session. The first question comes from Marissa Lobo with UBS.
Good morning. Thank you for taking my question. First, if you could speak to the competition commentary — points to increased competition from banks, life companies, securitized lenders — are you seeing that directly in your deal process?
Sure, Marissa. Yes, we are absolutely seeing more competition. Where we play in the middle market, borrowers have a lot of options. They can go to local banks and regional banks for their financing needs. Life companies are active as well as the securitization market, particularly for multifamily loans. Our average loan size now is about $30 million, so borrowers have many options, more so from the banks than they have in the past because banks are becoming more active. But what I will say is that competition and the activity we are seeing with banks returning to the market is also healthy for our business because it is allowing our existing borrowers to have more liquidity to refinance our assets as they mature. So loans on our balance sheet have more options to be repaid or refinanced at maturity. Overall, it is healthy, but the competition is having an impact on pricing spreads.
Okay, great. And just shifting, thanks for the color on Yardley, but is there any update on the anticipated disposition timeline for that asset?
I think pending the lease negotiations that are happening now — which we believe will finalize in the very near term — we can consider bringing it to market toward the end of the year.
Got it. Okay. Thank you for taking my questions.
Sure.
Our next question comes from Jason Weaver with Jones Trading.
Hey, good morning, guys. Just a question on the $4.9 million provision — with still no non-current, non-accrual, or realized losses — I have to think this is a specific reserve against an asset. Would that pertain to the Dallas multifamily property? And if so, what factors drove that decision?
Sure. Thanks for the question. We have three office loans that are maturing between August and the end of this year. The increase in reserve of about $4.9 million in the quarter was really driven by two of those office loans, given the near-term maturity and considerations around collateral values and related factors. It is important to note that all of our office loans are performing and generating positive cash flow. We have a slide in our earnings presentation showing the details of those office properties. But it is really a function of the near-term risk with those maturities.
Got it. Okay. Thanks for that. And then can you give any detail — I did not see anything in the deck regarding the Plano loan extension. Are there any rate changes, or is there an equity injection by the sponsor?
We did a two-year extension on that asset. The property is performing terrific, far outperforming its budget. The borrower paid an extension fee and acquired a new interest rate cap, so they invested some capital. This is a covered loan with a debt yield approaching 12% and coverage approaching 1.4x, so it is a very healthy loan. There was no need to pay down the principal balance for that loan.
Got it. Alright. Thanks for the color, guys. Thank you.
Our next question comes from Craig Kucera with Lucid Capital Markets.
Hey, good morning, guys. I see the coupon on the Park City, Utah asset, but can we get the all-in SOFR spread for that one?
So the spread on that loan was 3.25% over SOFR. It also has an exit fee as part of the financing terms.
So is that roughly 40 basis points above the coupon? Or how should we think about that?
Yes. The exit fee is amortized over three years, so about 33 basis points would be a way to think about a 1% exit fee. You can tack that on to the spread.
Okay. That makes sense. And I am just curious, your comments about competition and a little bit of spread compression — when you look at what you originated here in the second quarter versus the fourth quarter and first quarter, SOFR spreads are a little bit down. How much of that would you attribute to mix versus just the overall market?
A big part of it is mix. The assets we originated in the quarter were largely commercial assets where we had additional pricing power, resulting in higher returns for those loans. We have banked a meaningful amount of net interest margin over the last two quarters. We have been selectively expanding originations this quarter to do a bit more multifamily where available. Market pricing for a full loan on a multifamily deal today can range roughly from SOFR plus 2.35% to 2.75% depending on who is providing the financing and the cash flow of the asset. We are generally looking at multifamily deals in the SOFR plus 2.65% to 2.95% range where we can achieve attractive pricing. Those are round numbers, but I think in the next quarter or two we will be able to originate a few of those loans at slightly tighter net interest margins, continue to grow the portfolio, and balance the mix.
Got it. And I feel like earlier in the year you thought you were going to grow your loan portfolio to maybe $950 million. Is that still the target for the year? Can you talk about anticipated pacing? Is that front-loaded or back-loaded?
Yes, we are still targeting the $950 to $960 million range, which would put us about $200 million net of where we ended the quarter and about $170 million net of where we are today. A significant part of that growth will occur in Q3 and Q4. The pipeline we are looking at right now suggests Q3 closings will be toward the end of the quarter.
Got it. Okay, that is helpful. One more: you were inside of a month from the maturation of the $44 million Dallas office loan. Jared, based on your conversations with the borrower, can you handicap whether you think it will be paid or extended?
We believe that loan will be paid off. We have been in negotiations. What happens with extensions, loan modifications, and payoffs often does not come to a head until just prior to maturity. We are actively in discussions with the sponsor, but we do believe that will be a payoff.
Our next question comes from Christopher Nolan with Ladenburg Thalmann.
Hey, guys. On the office question, is the reserve reflecting some sort of anticipation of a restructuring if these borrowers are short?
No, it is really more just a function of the overall CECL model and looking at the current collateral value as part of negotiations. On one of these loans, we did get an appraisal, and I would say the stabilized value in that appraisal shows that we have a covered loan. So it is really a function of where we are today in the maturity window of that loan.
Great. And it is going to be taken, theoretically, out by a bank, correct?
Most likely. We are not 100% sure on how they are going to recapitalize it, but that is our belief.
In that case, what are current LTVs that banks are making for office loans these days?
We see it all over the board, but my guess would be around a 65% LTV in many cases.
And Christopher, you have great sponsorship on that asset; the sponsor has been supportive when needed. We expect they will step up and support the asset at refinance.
Great. And follow-up on paid-in capital: quarter-over-quarter increase from $3.04 to $3.40 — what was that related to, please?
I'm not sure I follow your question on that specific line item.
Oh, I am looking on the balance sheet at paid-in capital. Maybe I missed it. I will take it offline; it is no big deal. Okay, thank you.
Our next question comes from Christopher Muller with Citizens Capital Markets.
Hey, guys, thanks for taking the questions. I see the comment in the deck that deploying the rights offering is still ongoing. How much of a drag on earnings in the second quarter was that capital not being fully deployed? I'm trying to get a sense of run-rate earnings excluding that drag.
Yes, thanks for the question, Christopher. It was a bit of a drag. For the quarter, we were a net reduction of $10 million when you take the $75 million of production offset by the $85 million of repayments. So we were lagging a bit behind our overall production forecast, but we remain confident in hitting our numbers by the end of the year. Tom mentioned a net portfolio growth target of about $200 million, and a lot of that is expected September through Q4. We have about $300 million of term sheets outstanding currently, so we remain committed to our year-end forecast.
Got it. And then on repayments, what was the timing in the quarter? I'm looking at the $70 million of cash and wondering if there were late repayments that elevated that number.
A lot of it was the $55 million loan that was repaid in early April. From an earnings perspective, we did not replace much of that until later in the quarter, which is why we saw a one-cent decline from Q1. We also proactively repaid the repo associated with that loan in Q1 because of the certainty of closing, so we received more cash as part of that repayment.
Makes sense. Appreciate you guys taking the questions today. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Tom Lorenzini, President and Chief Investment Officer, for any closing remarks.
Thank you everyone for joining today's call. Please reach out to Investor Relations if you are interested in scheduling a meeting with 7 Hills. Operator, that concludes our call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.