Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Seven Hills Realty Trust (SEVN, Financial) reported strong second quarter results with distributable earnings per share of $0.38, exceeding analyst consensus estimates.
- The company has a stable loan portfolio with no loans in default and no nonaccrual loans.
- SEVN closed $41.6 million in new loan commitments during the second quarter, indicating robust loan production.
- The company maintains ample liquidity with over $345 million in liquidity, including $69 million in cash and $276 million in borrowing capacity.
- SEVN's portfolio is diversified across various property types, with multifamily being the largest at 37% and office exposure reduced to 27%.
Negative Points
- The competitive market environment is challenging, with many transactions being highly contested by multiple lenders.
- The company's CECL reserve increased slightly to 120 basis points from 100 basis points in the previous quarter.
- Total debt to equity ratio increased from 1.5 times to 1.6 times, primarily due to loan repayments.
- The company expects distributable earnings to be flat sequentially at $0.35 per share, excluding prepayment income.
- The origination environment remains uncertain, with many potential transactions not materializing due to borrowers sticking with their current lenders.
Q & A Highlights
Q: Can you address the origination environment and the level of competition within the marketplace? Is the amount of capital coming in crowding out opportunities for Seven Hills Realty Trust?
A: The market is competitive due to a lack of new transactions, leading to more refinance opportunities. Often, borrowers shop around but stick with their current lenders. When we find transactions that work, they are very competitively bid. We anticipate that rate relief in the back half of the year will lead to more transactions and opportunities for lenders like us.
Q: Has your estimate of activity picking up in the back half of the year changed with recent softer economic figures indicating potential monetary easing?
A: Yes, we have grown more confident. At the beginning of the year, expectations of rate cuts led to an uptick in volume. As the Fed backed off, volume dropped. Now, with the possibility of rate cuts, optimism is returning among real estate investors, leading to more transactions.
Q: How are you thinking about portfolio growth over the coming quarters? Is the current pace of origination a good ballpark?
A: We anticipate six to eight transactions in 2024, with two already closed and one in diligence. Our goal is approximately $200 million in total production for 2024, most of which will occur in Q3 and Q4.
Q: With the rent concessions on the Yardley office now expired, is a sale in 2024 a possibility? Have you started marketing that property yet?
A: We have not started marketing the Yardley office. We plan to hold it through 2024. The property is performing well, with 81% occupancy, and fits well within our portfolio. We will make a decision with the Board in 2025.
Q: Can you repeat the guidance for the next quarter?
A: We are guiding $0.35 per share, excluding $0.03 of prepayment income from the second quarter. This guidance includes the contribution from the Yardley property.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
