Seven Hills Realty Trust Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 28, 2022

Key Takeaways

  • Positive Sentiment: We closed $96 million of new loans in Q1, bringing total committed capital to a record $685 million and built a pipeline exceeding $1.2 billion.
  • Positive Sentiment: In January, we announced a 67% increase in our quarterly dividend to $0.25 per share, translating to an annualized ~9% yield.
  • Positive Sentiment: Our portfolio is now 100% floating rate with a weighted average coupon of 4.6% and an all-in yield of 5.1%, with each 50 bp rise in rates adding roughly $0.06 in annual EPS.
  • Positive Sentiment: We reported Q1 GAAP net income of $11.1 million (~$0.76/share) and adjusted distributable earnings of $5.3 million (~$0.37/share), comfortably covering our dividend.
  • Neutral Sentiment: Our liquidity remains strong with $263 million of unused borrowing capacity across expanded facilities at Wells Fargo, BMO, and Citi, and a debt-to-equity ratio of 1.4×.
AI Generated. May Contain Errors.
Earnings Conference Call
Seven Hills Realty Trust Q1 2022
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning, and welcome to the 7 Hills Realty Trust First Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. 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 Kevin Barry, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are President, Tom Lorenzini and Chief Financial Officer and Treasurer, Doug Lenoy. In just a moment, they will provide details about our business and our performance Transmission of today's conference call is strictly prohibited without Seven Hills Realty Trust's prior written consent. 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.

Speaker 1

These forward looking statements are based on 7 Hill's beliefs and expectations as of today, Thursday, April 28, 2022, 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 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 numbers during this call, including distributable earnings, distributable earnings per share, adjusted distributable earnings, Adjusted distributable earnings per share and adjusted book value per share.

Speaker 1

For a reconciliation of GAAP to non GAAP financial measures, please see our quarterly earnings release, is available on our website. I will now turn the call over to Tom.

Speaker 2

Thank you, Kevin. Good morning, everyone, and welcome to the Q1 earnings call for Seven Hills Realty Trust. After a productive and transformative year for our company in 20 21, we continue to build on our momentum and execute against our key priorities, focused on fully deploying our capital to nearly $1,000,000,000 in assets, Increasing and diversifying our capital base with additional debt capacity and increasing returns to our shareholders. I'm pleased to report that we're off to a great start this year making progress in each of these areas. During the Q1, we closed nearly $100,000,000 of new loans, which outpaced loan repayments during the period and total committed capital increased to a record $685,000,000 Our deal pipeline has never been stronger and has increased to more than $1,000,000,000 positioning 7 Hills to accelerate originations in the months ahead.

Speaker 2

We entered new financing arrangements and increased and extended existing facilities to support continued earnings growth and 1st quarter adjusted distributable earnings increased Our primary goal is to deliver strong returns to our shareholders. To that end, in January, we announced a 67% increase in our quarterly dividend to $0.25 per share, which we have maintained for our May distribution and we remain focused on further enhancing returns. We also continue to strengthen Seven Hills corporate governance. In March, we welcome Phyllis Hollis as the newest member of our Board of Trustees. Phyllis has more than 30 years of financial services industry experience With a strong background in fixed income investments, investment banking and capital raising, we look forward to drawing a perspective as we continue Our work to create value for our shareholders.

Speaker 2

Turning to our Q1 investment activity and loan book at quarter end. Our manager, Tremont Realty Capital originated 3 new loans for approximately $96,000,000 of committed capital And funded an additional $3,000,000 of follow on fundings. Consistent with the prior quarter, the percentage of initial fundings, the total new loan commitments Was approximately 95%, allowing us to put more capital to work at the inception of each loan. Our Q1 investment activity The borrowers on 2 loans were repeat sponsors, while the 3rd was a new relationship added to our portfolio. These investments are secured by multifamily, Grocery or drugstore anchored retail properties with a weighted average loan to value of 64%.

Speaker 2

The loans carry attractive return profiles with spreads ranging from 3.85 basis points to 4.25 basis points with an average loan size of approximately $32,000,000 in line with our target investment focus. As part of our asset management process, we actively monitor portfolio and proactively communicate with our borrowers regarding the plans for their property and our loan. In February, We increased the loan commitment on our Yardley, Pennsylvania office loan by $1,600,000 and extended the initial maturity date by 1 year, allowing the sponsor to further execute their business plan. We also received $48,000,000 from 2 loan repayments during the Q1. Although this activity partially offset our portfolio growth, we realized relatively significant prepayments fee income, highlighting our ability to thoughtfully structure our investments in a manner designed to protect the cash flow produced by our portfolio.

Speaker 2

We ended the Q1 with 27 first mortgage loans with an aggregate commitment of $685,000,000 representing a new high watermark for Seven Hills loan book. Our investments are 100% floating rate with a weighted average coupon of 4.6% and an all in yield of 5.1%. In aggregate, the portfolio has a weighted average loan to value of 68% and a weighted average maximum maturity of 3.7 years when including extension options. Our loan book has the added benefit of relatively recent underwriting with more than 80% of the principal balance underwritten Post the onset of the COVID pandemic, the credit quality of our portfolio remains strong with all of our loans current on debt service, no loans in default And our portfolio risk rating has further improved quarter to quarter to 2.8. We continue to see Many attractive opportunities to deploy our available capital and reach nearly $1,000,000,000 in assets this summer.

Speaker 2

We currently have 40 deals in our pipeline Consistent of potential transactions totaling more than 1,200,000,000 in various stages of review, underwriting and diligence. This volume is indicative of the strong demand for commercial real estate debt and the attractive market opportunity for Seven Hills to continue to gain scale and to execute on our plan to fully deploy Despite rising interest rates, the economic environment remains healthy with ample liquidity in the market Continuing to drive demand for commercial real estate investments. Given that our portfolio was 100% floating rate, Seven Hills shareholders can expect to see increased Interest income from our investments. In summary, for the full year operating as a mortgage REIT behind us, we are thrilled with the progress we're making at Seven Hills the opportunity in front of us to continue to build momentum. We are confident that our strategy will enable us to accelerate our growth and deliver attractive returns to our shareholders, including further dividend growth later this year.

Speaker 2

And with that, I will now turn the call over to Doug.

Speaker 3

Thank you, Tom, and good morning, everyone. Over the next few minutes, I will discuss our financial performance as well as our capitalization and liquidity. As we discussed on prior calls, Our financial results include purchase discount accretion related to loans that we acquired from our merger with Tremont Mortgage Trust last fall. We recognize this non cash accretion in net income and deduct it from our calculation of distributable earnings. Our supplemental financial package contains further details on our estimate of purchase discount accretion in the coming quarters.

Speaker 3

Turning to our financial performance for the Q1. 7 Hills reported GAAP net income of $11,100,000 or $0.76 per share, Including non cash accretion of $5,900,000 or $0.41 per share. Adjusted distributable earnings came in at $5,300,000 or $0.37 per share, which was well in excess of our quarterly dividend. Our earnings include prepayment income of approximately $2,300,000 or $0.16 per share, driven by 2 loan prepayments ahead of their initial maturity. Interest income from investments was $9,600,000 An increase of 33% on a sequential quarter basis, primarily driven by prepayment income during the Q1.

Speaker 3

7 Hill's adjusted book value increased to $18.95 per share at the end of the Q1. Now turning to our balance sheet. We ended the quarter with approximately $369,000,000 drawn On our secured financing facilities and unused but available capacity of $263,000,000 our capital position was strong With a debt to equity ratio of approximately 1.4 times, we expect to achieve a target leverage of 2.5 to 3 times as we deploy our available capital. As Tom mentioned earlier, we have made significant progress on our strategic priority Further diversifying and expanding our investment capital with competitive sources of financing. During the quarter, we closed a purchase facility with Wells Fargo.

Speaker 3

And in April, we upsized our non mark to market facility with BMO Harris Bank, Raising our maximum borrowing capacity to more than $800,000,000 We also extended our Citibank repurchase facility by 3 years, which we believe reflects our strong working relationship with them. We currently have sufficient liquidity to originate an additional 2 $60,000,000 of loans. With respect to interest rates, our earnings have benefited from interest floors on our loans. Our weighted average floor was 61 basis points at quarter end. 1 month term SOFR and LIBOR Currently exceed our weighted average interest floor.

Speaker 3

With expectations that the Federal Reserve will continue to raise rates throughout 2022, Higher interest rates will directly benefit our net interest income, given that 100% of our portfolio and 100% of our funding liabilities are floating rate. As of today, each 50 basis point increase And the interest rate index equates to an incremental $0.06 of distributable earnings per share annually. Earlier this month, we announced that our quarterly dividend of $0.25 per share. On an annualized basis, this Translates to an attractive dividend yield of approximately 9% on our current stock price. As we expand loan production and increase our operating leverage, We expect run rate adjusted distributable earnings to significantly exceed our dividend.

Speaker 3

Based on this outlook, we are well positioned to deliver enhanced returns to our shareholders in the back half of twenty twenty two. That concludes our prepared remarks. Operator, please open up the lines for questions.

Operator

We will now begin the question and answer session. And our first question will come from Chris Mueller of JMP Securities. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking the questions and congrats on a great start to the year. I just want to hit on the interest sensitivity a little bit just to make sure I'm understanding correctly. So looking at the Slide 11 with the chart you guys have there. That was done March 31, I believe.

Speaker 4

So That was LIBOR was 30, 40 bps lower than we're currently sitting at. So your comments on every 50 bps increase is $0.06 I In earnings, we're currently sitting at that almost 50.5% mark on that chart today. Is that the right way to look at that?

Speaker 3

That's correct. You've got it right. Yes, we're really through the we're over the hump in terms of any Dampening of our earnings from our floors. So at this point, we're we've got really a direct Connect direct correlation between interest rate increases and our earnings.

Speaker 4

Got it. And then just the other one I had. It's nice to see the new credit facilities there, obviously expanding the financing base. Do you guys have any timeline that you're looking at on how quickly leverage will ramp up? I think you're at 1.4 now and so you're talking about getting almost double that.

Speaker 4

Is that like a year end type timeline there?

Speaker 2

No, we expect that really to be this summer, Chris, as we fully deploy the remainder of the capital here.

Speaker 4

Great. That'll be great to see and looking forward to it. Thanks for taking the questions.

Speaker 2

Thank you.

Operator

And the next question will come from Jason Stewart of Jones Trading. Please go ahead.

Speaker 5

Hey, it's Matthew Ordner filling in for Jason. You mentioned deploying the capital this summer, So I'm guessing the pipeline is there. Is there a specific asset within that that's kind of more so centered around than others? And what does that look like?

Speaker 2

No individual asset, Matt, but certainly we're looking at more multifamily transactions now than we have historically, Which I think is just a function of the market. Current pipeline is about $1,200,000,000 So we have our opportunities to Choose those transactions that we wish to pursue. So we're feeling very comfortable with the pipeline right now.

Speaker 5

Got you. And then with the multifamily, is there a specific geographic region that you guys are targeting or trying to increase your share

Speaker 2

Certainly, Sunbelt markets are attractive to us. We're seeing much more rental growth there, Along with some of the other secondary non gateway cities, in the Carolinas, certainly all over Florida, certainly in Texas, We're seeing tremendous growth there and that's where the opportunities lie right now.

Speaker 5

Right. That's good. And then in terms of competition, are you guys seeing a lot of that? Or is it kind of you guys are kind of in your own bucket and other people are in different ones?

Speaker 2

No, it's a competitive landscape for sure. What we've seen as of late really with this little bit of the backup and the securitization in the CLO markets, We've actually we're seeing increased flow, because some of the smaller CLO shops, I think are sitting on the sidelines right now until they can clear their decks. So it's really been an opportunity for us to pick up some market share.

Speaker 5

Awesome. That's great. Thank you.

Speaker 2

Thank

Operator

you. This concludes our question and answer session. I would like to turn the conference back Over to Tom Lorenzini, President for any closing remarks.

Speaker 2

Thank you, Andrea, and thank you for joining us today and for your interest in Seven Hills Realty Trust. We look forward to

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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