Seven Hills Realty Trust (NASDAQ:SEVN) reported third-quarter 2026 Distributable Earnings of $3.8 million, or $0.17 per share, including a $1.5 million realized loss related to the repayment of a Dallas office loan. Excluding that loss, Distributable Earnings were $5.3 million, or $0.24 per share, which management said was at the midpoint of its guidance and in line with consensus estimates.
President and Chief Investment Officer Tom Lorenzini said the quarter was marked by increased lending activity and further reduction of the company’s legacy office exposure. Seven Hills originated three loans totaling $122.3 million, its highest quarterly origination volume since the fourth quarter of 2021. The investments included a $68 million loan secured by a Class A multifamily property in Chattanooga, Tennessee; a $30 million loan on a 95%-leased retail property in Charlotte, North Carolina; and a $24.3 million loan secured by a high-end retail property in Park City, Utah.
Management said virtually all proceeds from the three loans were funded at closing, avoiding earnings drag from future unfunded commitments. The company also received $139 million of repayments during the quarter.
Office Exposure Declines Following Loan Resolutions
The Dallas office loan repaid at approximately 97% of its $44.2 million outstanding balance, resulting in a $1.5 million discount. Lorenzini said the loss was substantially below the $6.3 million current expected credit loss, or CECL, reserve previously allocated to the investment. The repayment also released roughly $46 million of lending capacity because the loan had been underlevered.
Chief Financial Officer and Treasurer Matt Brown said the Dallas repayment roughly doubled the company’s lending capacity to about $93 million and should enable Seven Hills to redeploy proceeds at higher net spreads. The company had earned a net spread of only 100 basis points on the Dallas loan, he said.
Office exposure fell to 13% of the portfolio at the end of the third quarter from 19% at the end of the second quarter. After the quarter ended, Seven Hills resolved its Carlsbad, California, office loan through a property sale that generated approximately $22.1 million in proceeds, equal to about 90% of the loan’s $24.7 million outstanding principal balance. The company expects to record a realized loss of about $2.6 million in the fourth quarter, which management said was fully reserved as of Sept. 30.
The Carlsbad repayment lowered office exposure to 10% and unlocked an additional approximately $11 million of investment capacity, according to Lorenzini. He said Seven Hills expects office exposure to continue declining into the high single digits in coming quarters as loans repay and capital is redeployed.
The company’s remaining office maturity in 2026 is a $23.5 million loan backed by a 95%-leased suburban Chicago property. Management said it remains in discussions with the sponsor and expects to provide an update during the fourth quarter.
Credit, Liquidity and Portfolio Growth
All borrowers remained current on debt service at quarter-end, and the portfolio’s weighted average all-in yield was approximately 7.8%. The weighted average risk rating increased to 3.2 from 2.9 in the prior quarter, reflecting the repayment of two loans rated one and the downgrade of the Carlsbad office loan to a rating of five before its resolution.
Brown said Seven Hills’ CECL reserve totaled $9.5 million, or 130 basis points of total loan commitments, down from 190 basis points in the preceding quarter. The decline was largely tied to the Dallas loan resolution, while reserves were established for the quarter’s new originations.
Since beginning its lending program in 2018, Seven Hills has closed 72 loans totaling $1.93 billion, Lorenzini said. Combined realized losses have totaled 0.2% over that period.
At quarter-end, Seven Hills had $51.5 million of cash and about $426 million of unused capacity under secured financing facilities. Two loans totaling $98 million that closed in late September were unlevered at quarter-end; financing them at typical advance rates could provide about $78 million of additional liquidity, Brown said. The company extended its Citibank facility to September 2028 and has no facility maturities before then.
- Debt-to-equity ratio: 1.4 times at Sept. 30.
- Expected leverage: Above two times as capital is deployed during the fourth quarter and early 2027.
- Portfolio size at the end of the third quarter: Approximately $745 million.
- Management’s expected year-end portfolio size: About $900 million, potentially more.
- Management’s 2027 portfolio target: Between $1 billion and $1.1 billion.
Pipeline and Earnings Outlook
Management said it has three loans in diligence totaling more than $120 million and expects them to close in the fourth quarter. Jared Lewis, vice president, said demand for debt capital remains supported by loans originated in 2021 and 2022 that are scheduled to mature over the next several years, despite interest-rate volatility and signs that property sale activity may be slowing.
Lewis said Seven Hills continues to identify opportunities in industrial, multifamily, retail, medical office, self-storage and student housing. While competition for high-quality transactions remains elevated, he said pricing on new investments has firmed and borrowers are placing increased value on certainty of execution.
In response to an analyst question, management said net margins on loans currently being evaluated range from roughly 145 to 165 basis points, while Brown said a reasonable longer-term assumption would be a net spread between 160 and 180 basis points.
For the fourth quarter, Seven Hills expects Distributable Earnings, excluding realized losses, of $0.25 to $0.27 per share. Reported results are expected to include the approximately $0.11-per-share Carlsbad realized loss. Brown said each $100 million of net portfolio growth at current spreads and advance rates would add about $0.04 per share to quarterly Distributable Earnings.
The board declared a quarterly dividend of $0.28 per share. Management now expects to achieve sustainable dividend coverage during the first half of 2027, with the timing reflecting later-than-anticipated loan closings rather than a change in origination assumptions.
About Seven Hills Realty Trust (NASDAQ:SEVN)
Seven Hills Realty Trust (NASDAQ: SEVN) is a real estate investment trust focused on originating and investing in senior mortgage loans secured by commercial real estate properties. The company primarily provides financing to owners and operators of middle-market and transitional properties, seeking to generate income from interest payments and other loan-related returns.
Its investments are generally backed by properties such as office buildings, industrial facilities, multifamily housing, hotels and other commercial real estate.
