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Seven Hills Realty Trust - Quarter Report: 2022 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-34383
 
Seven Hills Realty Trust
(Exact Name of Registrant as Specified in Its Charter)
Maryland20-4649929
(State of Organization)(IRS Employer Identification No.)
 
Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634
(Address of Principal Executive Offices)                            (Zip Code)
Registrant’s Telephone Number, Including Area Code 617-332-9530
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of each exchange on which registered
Common Shares of Beneficial InterestSEVNThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
 Accelerated filer
☐
Non-accelerated filer
☒
 Smaller reporting company☒
Emerging growth company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒
Number of registrant's common shares of beneficial interest, $0.001 par value per share, outstanding as of October 24, 2022: 14,709,426


Table of Contents
SEVEN HILLS REALTY TRUST
FORM 10-Q
September 30, 2022
 
INDEX
  Page
 
 


References in this Quarterly Report on Form 10-Q to "SEVN", "we", "us" or "our" mean Seven Hills Realty Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

Table of Contents
PART I. Financial Information
Item 1. Financial Statements
SEVEN HILLS REALTY TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)

September 30,December 31,
20222021
ASSETS
Cash and cash equivalents$76,371 $26,197 
Restricted cash66 98 
Loans held for investment, net 695,154 570,780 
Prepaid expenses and other assets3,608 2,918 
Total assets $775,199 $599,993 
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued liabilities and deposits$1,508 $1,561 
Secured financing facilities, net503,514 339,627 
Due to related persons1,768 1,111 
Total liabilities 506,790 342,299 
Commitments and contingencies
Shareholders' equity:
Common shares of beneficial interest, $0.001 par value, 25,000,000 shares authorized; 14,713,623 and 14,597,079 shares issued and outstanding, respectively
15 15 
Additional paid in capital 238,417 237,624 
Cumulative net income45,530 24,650 
Cumulative distributions(15,553)(4,595)
Total shareholders' equity 268,409 257,694 
Total liabilities and shareholders' equity $775,199 $599,993 


See accompanying notes.
1
Table of Contents
SEVEN HILLS REALTY TRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
INCOME FROM INVESTMENTS:
Interest income from investments$11,650 $4,510 $30,098 $9,566 
Purchase discount accretion1,596 — 9,167 — 
Less: interest and related expenses (5,447)(488)(10,191)(680)
Income from investments, net7,799 4,022 29,074 8,886 
OTHER EXPENSES:
Base management fees1,064 731 3,190 2,167 
General and administrative expenses1,016 433 3,340 1,739 
Reimbursement of shared services expenses520 349 1,520 950 
Other transaction related costs— — 37 — 
Total other expenses2,600 1,513 8,087 4,856 
Income before income taxes 5,199 2,509 20,987 4,030 
Income tax expense(23)(25)(107)(36)
Net income$5,176 $2,484 $20,880 $3,994 
Weighted average common shares outstanding - basic 14,551 10,263 14,526 10,225 
Weighted average common shares outstanding - diluted14,551 10,264 14,526 10,225 
Net income per common share - basic and diluted$0.35 $0.24 $1.43 $0.39 


See accompanying notes.


2
Table of Contents
SEVEN HILLS REALTY TRUST
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(amounts in thousands)
(unaudited)
Number ofAdditional
CommonCommonPaid In CumulativeCumulative
 SharesSharesCapitalNet Income DistributionsTotal
Balance at December 31, 202114,597 $15 $237,624 $24,650 $(4,595)$257,694 
Share grants— — 82 — — 82 
Net income— — — 11,126 — 11,126 
Distributions— — — — (3,649)(3,649)
Balance at March 31, 202214,597 15 237,706 35,776 (8,244)265,253 
Share grants42 — 548 — — 548 
Share forfeitures(1)— — — — — 
Net income— — — 4,578 — 4,578 
Distributions— — — — (3,649)(3,649)
Balance at June 30, 202214,638 15 238,254 40,354 (11,893)266,730 
Share grants85 — 259 — — 259 
Share repurchases(9)— (96)— — (96)
Net income— — — 5,176 — 5,176 
Distributions— — — — (3,660)(3,660)
Balance at September 30, 202214,714 $15 $238,417 $45,530 $(15,553)$268,409 

Net assets at December 31, 202010,202 $10 $192,884 $— $— $192,894 
Net income— — — 350 — 350 
Balance at March 31, 202110,202 10 192,884 350 — 193,244 
Share grants15 — 181 — — 181 
Net income— — — 1,160 — 1,160 
Distributions— — — — (1,530)(1,530)
Balance at June 30, 202110,217 10 193,065 1,510 (1,530)193,055 
Issuance of shares4,285 5 44,170 — — 44,175 
Net income— — — 2,484 — 2,484 
Distributions— — — — (3,065)(3,065)
Balance at September 30, 202114,502 $15 $237,235 $3,994 $(4,595)$236,649 


See accompanying notes.

3
Table of Contents
SEVEN HILLS REALTY TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

Nine Months Ended September 30,
20222021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$20,880 $3,994 
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of purchase discount(9,167)— 
Share based compensation889 181 
Amortization of deferred financing costs784 87 
Amortization of loan origination and exit fees(2,935)(1,212)
Changes in operating assets and liabilities:
Prepaid expenses and other assets(1,092)(855)
Accounts payable, accrued liabilities and deposits(53)(1,814)
Due to related persons657 916 
Net cash provided by operating activities9,963 1,297 
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of loans held for investment(179,265)(187,989)
Additional funding of loans held for investment(12,095)(2,458)
Repayment of loans held for investment79,490 18,433 
Payment of merger related costs— (6,160)
Cash assumed in merger— 11,070 
Net cash used in investing activities(111,870)(167,104)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured financing facilities284,867 97,715 
Repayments under secured financing facilities(119,905)(10,332)
Payments of deferred financing costs(1,859)(698)
Repurchase of common shares(96)— 
Distributions(10,958)(4,595)
Net cash provided by financing activities152,049 82,090 
Increase (decrease) in cash, cash equivalents and restricted cash50,142 (83,717)
Cash, cash equivalents and restricted cash at beginning of period26,295 103,564 
Cash, cash equivalents and restricted cash at end of period$76,437 $19,847 






4
Table of Contents
SEVEN HILLS REALTY TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
20222021
SUPPLEMENTAL DISCLOSURES:
Interest paid$8,728 $467 
Income taxes paid$92 $2,477 
NON-CASH INVESTING ACTIVITIES
Loans held for investment acquired by issuance of common shares$— $162,990 
Working capital net liabilities assumed$— $924 
NON-CASH FINANCING ACTIVITIES
Assumption of master repurchase facility$— $128,962 
Issuance of common shares$— $44,175 

SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
The table below provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:
As of September 30,
20222021
Cash and cash equivalents$76,371 $19,298 
Restricted cash66 549 
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows$76,437 $19,847 

See accompanying notes.
5
Table of Contents
SEVEN HILLS REALTY TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2021, or our 2021 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim periods have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include the fair value of financial instruments.

Note 2. Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. As a smaller reporting company, we will adopt ASU No. 2016-13 on January 1, 2023. The amount of the allowance for credit losses established as a result of the adoption will be presented as a cumulative-effect adjustment to reduce equity as of the date of adoption.
While we are currently evaluating the impact ASU No. 2016-13 will have on our condensed consolidated financial statements, we expect that the adoption will result in an increased amount of provisions for potential loan losses and for such provisions to be recognized earlier in the credit cycle. We currently do not have any provisions for loan losses recorded in our condensed consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the guidance for and recognitions of troubled debt restructurings for all entities that have adopted ASU No. 2016-13. Instead, an entity must apply the loan refinancing and restructure guidance in Accounting Standards Codification, or ASC, Topic 310, Receivables (Topic 310), to determine whether a modification results in a new loan or continuation of an existing loan. If a borrower is experiencing financial difficulty, enhanced disclosures are required. ASU No. 2022-02 also amended the guidance on vintage disclosures to require disclosure of current period gross write-offs by year of origination. We will adopt ASU No. 2022-02 prospectively on January 1, 2023, concurrently with the adoption of ASU No. 2016-13. As of September 30, 2022, we have not recognized any troubled debt restructurings and do not expect the adoption of ASU No. 2022-02 to have a material impact on our condensed consolidated financial statements.
Note 3. Loans Held for Investment
We originate first mortgage loans secured by middle market and transitional commercial real estate, or CRE, which are generally to be held as long term investments. We funded our loan portfolio using cash on hand and advancements under our Secured Financing Facilities, as defined in Note 4. Additionally, we acquired the loan portfolio of Tremont Mortgage Trust, or TRMT, in the merger of TRMT with and into us on September 30, 2021, or the Merger. See Note 4 for further information regarding our secured financing agreements.


6

SEVEN HILLS REALTY TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

The table below provides overall statistics for our loan portfolio as of September 30, 2022 and December 31, 2021:    
As of September 30, 2022As of December 31, 2021
Number of loans2826
Total loan commitments$763,076$648,266
Unfunded loan commitments (1)
$57,712$57,772
Principal balance $705,460$590,590
Carrying value$695,154$570,780
Weighted average coupon rate6.59 %4.54 %
Weighted average all in yield (2)
7.10 %5.08 %
Weighted average floor0.55 %0.68 %
Weighted average maximum maturity (years) (3)
3.53.8
Weighted average risk rating2.92.9
(1)    Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded over the term of the loan.
(2)    All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.
(3)    Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions.

The tables below represent our loan activities during the three months ended September 30, 2022 and 2021:

Principal BalanceDeferred Fees and Other ItemsCarrying Value
Balance at June 30, 2022$682,285 $(12,100)$670,185 
Additional funding4,267 — 4,267 
Originations38,440 (510)37,930 
Repayments(19,532)(115)(19,647)
Net amortization of deferred fees— 823 823 
Net purchase discount accretion— 1,596 1,596 
Balance at September 30, 2022$705,460 $(10,306)$695,154 
Principal BalanceDeferred Fees and Other ItemsCarrying Value
Balance at June 30, 2021$212,515 $(1,773)$210,742 
Additional funding1,710 — 1,710 
Originations71,534 (800)70,734 
Repayments(18,433)— (18,433)
Net amortization of deferred fees— 571 571 
Loans acquired in Merger (1)
204,692 901 205,593 
Purchase discount on loans acquired in Merger— (36,443)(36,443)
Balance at September 30, 2021$472,018 $(37,544)$434,474 
(1)    Deferred fees and other items for loans acquired in the Merger represent exit fees contractually due upon repayment of loans acquired in the Merger.
7

SEVEN HILLS REALTY TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

The tables below represent our loan activities during the nine months ended September 30, 2022 and 2021:
Principal BalanceDeferred Fees and Other ItemsCarrying Value
Balance at December 31, 2021$590,590 $(19,810)$570,780 
Additional funding12,497 — 12,497 
Originations181,244 (1,979)179,265 
Repayments(78,871)(619)(79,490)
Net amortization of deferred fees— 2,935 2,935 
Net purchase discount accretion— 9,167 9,167 
Balance at September 30, 2022$705,460 $(10,306)$695,154 
Principal BalanceDeferred Fees and Other ItemsCarrying Value
Balance at December 31, 2020$92,863 $(984)$91,879 
Additional funding2,677 — 2,677 
Originations190,219 (2,230)187,989 
Repayments(18,433)— (18,433)
Net amortization of deferred fees— 1,212 1,212 
Loans acquired in Merger (1)
204,692 901 205,593 
Purchase discount on loans acquired in Merger— (36,443)(36,443)
Balance at September 30, 2021$472,018 $(37,544)$434,474 
(1)    Deferred fees and other items for loans acquired in the Merger represent exit fees contractually due upon repayment of loans acquired in the Merger.

The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of September 30, 2022 and December 31, 2021:
September 30, 2022December 31, 2021
Property Type
Number of Loans
Carrying Value
Percentage of Value
Number of Loans
Carrying Value
Percentage of Value
Office (1)
12$270,550 39 %13$269,865 47 %
Multifamily8195,530 28 %5106,002 19 %
Lab—— — %113,398 2 %
Retail5130,970 19 %488,724 16 %
Industrial (1)
398,104 14 %392,791 16 %
28$695,154 100 %26$570,780 100 %
(1)    Two loan investments secured by mixed use properties consisting of office space and an industrial warehouse in Aurora, IL and Colorado Springs, CO are classified as office for the purpose of counting the number of loans in our portfolio because the majority of the square footage of each of the properties consists of office space. The carrying value of these loan investments is reflected in office and industrial based on the fair value of the buildings at the time of origination relative to the total fair value of the properties.
September 30, 2022December 31, 2021
Geographic Location
Number of Loans
Carrying Value
Percentage of ValueNumber of LoansCarrying ValuePercentage of Value
East4$104,749 15 %3$55,132 10 %
South6164,920 24 %7153,495 27 %
West9175,380 25 %8145,453 25 %
Midwest9250,105 36 %8216,700 38 %
28$695,154 100 %26$570,780 100 %
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SEVEN HILLS REALTY TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

Loan Credit Quality
We evaluate each of our loans for impairment at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors. The higher the number, the greater the risk level. See our 2021 Annual Report for more information regarding our loan risk ratings.

The table below allocates the carrying value of our loan portfolio at September 30, 2022 and December 31, 2021 based on our internal risk rating policy:
September 30, 2022December 31, 2021
Risk RatingNumber of LoansCarrying ValueNumber of LoansCarrying Value
1—$— —$— 
29194,380 494,743 
315398,432 21463,600 
44102,342 112,437 
5—— —— 
28$695,154 26$570,780 
The weighted average risk rating of our loans by carrying value was 2.9 as of September 30, 2022 and December 31, 2021, respectively. Certain of our borrowers' business operations or tenants, particularly certain office and retail properties, were negatively impacted by the COVID-19 pandemic and continue to be impacted by market conditions that arose or intensified during or in response to the pandemic and have continued. Current inflationary pressures, rising interest rates, supply chain issues and the possibility that the U.S. economy is now in, or may soon enter, a recession could amplify those negative impacts. Therefore, certain of our borrowers’ business plans will likely take longer to execute than initially expected, and as a result, certain of our borrowers may be unable to pay their debt service obligations owed and due to us as currently scheduled or at all. As of September 30, 2022, we had four loans representing approximately 15% of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk".

We may enter into loan modifications that include among other changes, extensions of maturity dates, repurposing or required replenishment of reserves, increases or decreases in loan commitments and required pay downs of principal amounts outstanding. Modifications that represent concessions to a borrower that is experiencing financial difficulties are classified as troubled debt restructurings and considered impaired.

In February 2022, we amended the agreement governing our loan secured by an office property located in Yardley, PA. As part of this amendment, the loan commitment was increased by $1,600, or the Additional Advance, and may be used to finance debt service costs and operating costs of the borrower and the initial maturity date was extended by one year to December 19, 2023. For purposes of calculating interest due to us for this loan, the Additional Advance is deemed to be outstanding as of the date of the amendment, regardless of whether such amounts have been advanced, at the London Interbank Offered Rate, or LIBOR, or a replacement base rate determined by us if LIBOR is no longer available, plus 12.0%. As of September 30, 2022, this loan had a risk rating of 4 and an outstanding principal balance of $15,251. The modification of this loan resulting from the amendment was determined not to be a troubled debt restructuring. However, we accounted for this modification as an extinguishment in accordance with ASC Topic 310, Receivables, because the changes to the terms were determined to be more than minor. As such, we recognized the related unaccreted purchase discount of $1,748 as interest income from investments in our condensed consolidated statements of income during the first quarter of 2022.

There were no other material modifications to our loan portfolio during the nine months ended September 30, 2022.

We did not have any impaired loans or nonaccrual loans as of September 30, 2022 or December 31, 2021. As of September 30, 2022 and October 24, 2022, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.

In October 2022, we received $22,483 of loan repayment proceeds for an unlevered loan investment secured by a retail property located in Los Angeles, CA.

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SEVEN HILLS REALTY TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

Note 4. Secured Financing Agreements
Our secured financing agreements at September 30, 2022 consisted of agreements that govern: our master repurchase facility with Wells Fargo, National Association, or Wells Fargo, or the Wells Fargo Master Repurchase Facility; our master repurchase facility with Citibank, N.A., or Citibank, or the Citibank Master Repurchase Facility; our facility loan program with BMO Harris Bank N.A., or BMO, or the BMO Facility, and our master repurchase facility with UBS AG, or UBS, or the UBS Master Repurchase Facility. We refer to the Wells Fargo Master Repurchase Facility, Citibank Master Repurchase Facility and UBS Master Repurchase Facility, collectively, as our Master Repurchase Facilities. We refer to the Master Repurchase Facilities and the BMO Facility, collectively, as our Secured Financing Facilities. See our 2021 Annual Report for more information regarding our Secured Financing Facilities.
Wells Fargo Master Repurchase Facility

On March 11, 2022, one of our wholly owned subsidiaries entered into a master repurchase and securities agreement with Wells Fargo, or the Wells Fargo Master Repurchase Agreement, for the Wells Fargo Master Repurchase Facility. The Wells Fargo Master Repurchase Facility provides up to $125,000 in advances, with an option to increase the maximum facility amount to $250,000, subject to certain terms and conditions. We expect to use the Wells Fargo Master Repurchase Facility to finance the acquisition or origination of floating rate, commercial mortgage loans. We refer to our loan investments that secure advances we receive under any of our Secured Financing Facilities as the purchased assets. The expiration date of the Wells Fargo Master Repurchase Agreement is March 11, 2025, unless extended or earlier terminated in accordance with the terms of the Wells Fargo Master Repurchase Agreement.

Under the Wells Fargo Master Repurchase Facility, the initial purchase price paid by Wells Fargo for each purchased asset is up to 75% or 80%, depending on the property type of the purchased asset’s real estate collateral, of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, and subject to Wells Fargo’s approval. Upon the repurchase of a purchased asset, we are required to pay Wells Fargo the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Wells Fargo relating to such purchased asset. Interest on advancements under the Wells Fargo Master Repurchase Facility is calculated at the Secured Overnight Financing Rate, or SOFR, plus a premium.

In connection with our Wells Fargo Master Repurchase Agreement, we entered into a guaranty, or the Wells Fargo Guaranty, which requires us to guarantee 25% of the aggregate repurchase price, and 100% of losses in the event of certain bad acts as well as any costs and expenses of Wells Fargo related to our Wells Fargo Master Repurchase Agreement. The Wells Fargo Guaranty also contains financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity and a minimum interest coverage ratio and to satisfy a total indebtedness to stockholders’ equity ratio.

Our Wells Fargo Master Repurchase Facility also contains margin maintenance provisions that provide Wells Fargo with the right, in certain circumstances related to a credit event, as defined in the Wells Fargo Master Repurchase Agreement, to redetermine the value of purchased assets. Where a decline in the value of such purchased assets has resulted in a margin deficit, Wells Fargo may require us to eliminate any margin deficit through a combination of purchased asset repurchases and cash transfers to Wells Fargo subject to Wells Fargo’s approval.

In addition, our Wells Fargo Master Repurchase Agreement provides for acceleration of the date of repurchase of the purchased assets by us and Wells Fargo’s liquidation of the purchased assets upon the occurrence and continuation of certain events of default, including a change of control of us, which includes Tremont Realty Capital LLC, or Tremont, ceasing to act as our sole manager or to be a wholly owned subsidiary of The RMR Group LLC, or RMR.

Citibank Master Repurchase Facility

On March 15, 2022, we amended and restated our master repurchase agreement with Citibank, or the Citibank Master Repurchase Agreement. The amended and restated Citibank Master Repurchase Agreement increased the maximum amount of available advancements under our Citibank Master Repurchase Facility to $215,000, extended the stated maturity date to March 15, 2025, and made certain other changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the Citibank Master Repurchase Facility and modifying certain pricing terms.

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SEVEN HILLS REALTY TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

BMO Facility

On April 25, 2022, we amended our facility loan program agreement and the security agreement with BMO, or the BMO Loan Program Agreement, to increase the maximum principal amount available under our BMO Facility, from $100,000 to $150,000.

UBS Master Repurchase Facility

On May 4, 2022, we amended and restated our master repurchase agreement with UBS, or the UBS Master Repurchase Agreement. The amended and restated UBS Master Repurchase Agreement, which was effective March 9, 2022, made certain changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the UBS Master Repurchase Facility and modifying certain pricing terms.

As of September 30, 2022, we were in compliance with the covenants and other terms of the agreements that govern our Secured Financing Facilities.

As of September 30, 2022 and October 24, 2022, we had a $505,831 aggregate outstanding principal balance under our Secured Financing Facilities.

As of September 30, 2022, our outstanding borrowings under our Secured Financing Facilities had the following remaining maturities:
YearPrincipal Payments on
Secured Financing Facilities
2022$21,316 
202394,117
2024262,815
2025127,583
2026 and thereafter—
$505,831 
The table below summarizes our Secured Financing Facilities as of September 30, 2022 and December 31, 2021:

Debt Obligation
Weighted AverageCollateral
Maximum Facility SizePrincipal BalanceCarrying Value
Coupon Rate (1)
Remaining Maturity (years) (2)
Principal Balance
September 30, 2022:
Citibank Master Repurchase Facility$215,000 $160,206 $159,935 4.86 %1.3$220,192 
UBS Master Repurchase Facility192,000 167,094 166,423 5.06 %1.5226,082 
BMO Facility150,000 111,105 110,399 4.73 %2.5148,476 
Wells Fargo Master Repurchase Facility125,000 67,426 66,757 4.83 %2.488,649 
Total/Weighted Average$682,000 $505,831 $503,514 4.89 %1.7$683,399 
December 31, 2021:
Citibank Master Repurchase Facility$213,482 $161,825 $161,724 2.03 %0.7$222,129 
UBS Master Repurchase Facility192,000 167,928 167,024 2.09 %2.0225,868 
BMO Facility100,000 11,116 10,879 2.01 %2.714,821 
Total/weighted average$505,482 $340,869 $339,627 2.06 %1.4$462,818 
(1)The weighted average coupon rate is determined using LIBOR or SOFR plus a spread ranging from 1.80% to 2.51%, as applicable, for the respective borrowings under our Secured Financing Facilities as of the applicable date.
(2)The weighted average remaining maturity is determined using the current maturity date of our corresponding loan investments, assuming no borrower loan extension options have been exercised. As of September 30, 2022, our Citibank Master Repurchase Facility, UBS Master Repurchase Facility and Wells Fargo Master Repurchase Facility mature on March 15, 2025, February 18, 2024 and March 11, 2025, respectively. Our BMO Facility matures at various dates based on the respective underlying loans held for investment.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

Note 5. Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level I) and the lowest priority to unobservable inputs (Level III). A financial asset’s or financial liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The carrying values of cash and cash equivalents, restricted cash and accounts payable approximate their fair values due to the short term nature of these financial instruments.
We estimate the fair values of our loans held for investment and outstanding principal balances under our Secured Financing Facilities by using Level III inputs, including discounted cash flow analyses and currently prevailing market terms as of the measurement date, determined by significant unobservable market inputs, which include holding periods, discount rates based on loan to value ratio, or LTV, property types and loan pricing expectations which are corroborated by a comparison with other market participants to determine the appropriate market spread to add to the current base interest.
The table below provides information regarding financial assets and liabilities not carried at fair value on a recurring basis in our condensed consolidated balance sheets:
September 30, 2022December 31, 2021
Carrying ValueFair ValueCarrying ValueFair Value
Financial assets
Loans held for investment$695,154 $709,159 $570,780 $597,669 
Financial liabilities
Secured Financing Facilities$503,514 $503,402 $339,627 $341,679 

There were no transfers of financial assets or liabilities within the fair value hierarchy during the nine months ended September 30, 2022.
Note 6. Shareholders' Equity
Common Share Awards
We have common shares available for issuance under the terms of our 2021 Equity Compensation Plan, or the 2021 Plan. The values of the share awards are based upon the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on the date of award. The common shares that we award to our Trustees as trustee compensation vest immediately. The awards of common shares that we award to our officers and other employees of Tremont and of RMR vest in five equal annual installments beginning on the date of award. We recognize the value of awarded shares in general and administrative expenses ratably over the vesting period. We recognize any share forfeitures as they occur.
On May 26, 2022, in accordance with our Trustee compensation arrangements, we awarded to each of our seven Trustees 6,000 of our common shares, valued at $10.66 per common share, the closing price of our common shares on the Nasdaq that day.
On September 14, 2022, we awarded an aggregate of 85,000 of our common shares, valued at $10.10 per share, the closing price of our common shares on Nasdaq that day, to our officers and certain other employees of Tremont and of RMR.
On September 19, 2022, we purchased 9,440 of our common shares from certain of our current and former officers and employees of Tremont and/or RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares, valued at $10.15 per share, the closing price of our common shares on Nasdaq that day. The aggregate value of common shares purchased was $96.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

Distributions

For the nine months ended September 30, 2022, we declared and paid regular quarterly distributions to common shareholders, using cash on hand, as follows:
Record DatePayment DateDistribution per ShareTotal Distribution
January 24, 2022February 17, 2022$0.25 $3,649 
April 25, 2022May 19, 20220.25 3,649 
July 25, 2022August 18, 20220.25 3,660 
$0.75 $10,958 
On October 13, 2022, we declared a quarterly distribution of $0.25 per common share, or $3,677, to shareholders of record on October 24, 2022. We expect to pay this distribution on or about November 17, 2022, using cash on hand.
Note 7. Management Agreement with Tremont
We have no employees. The personnel and various services we require to operate our business are provided to us by Tremont, pursuant to a management agreement, which provides for the day to day management of our operations by Tremont, subject to the oversight and direction of our Board of Trustees.
We pay Tremont an annual base management fee payable quarterly (0.375% per quarter) in arrears equal to 1.5% of our “Equity”, as defined under our management agreement. We recognized base management fees of $1,064 and $731 for the three months ended September 30, 2022 and 2021, respectively, and $3,190 and $2,145 for the nine months ended September 30, 2022 and 2021, respectively. Pursuant to the terms of our management agreement, management incentive fees became payable by us beginning with the quarter ended June 30, 2021, subject to Tremont earning those fees in accordance with the management agreement. We did not incur any management incentive fees for the three and nine months ended September 30, 2022 and 2021.
Tremont, and not us, is responsible for the costs of its employees who provide services to us, unless any such payment or reimbursement is specifically approved by a majority of our Independent Trustees, is a shared services cost or relates to awards made under any equity compensation plan adopted by us. We are required to pay or to reimburse Tremont and its affiliates for all other costs and expenses of our operations. Some of these overhead, professional and other services are provided by RMR, pursuant to a shared services agreement between Tremont and RMR. These reimbursements include an allocation of the cost of personnel employed by RMR and our share of RMR's costs for providing our internal audit function. These shared services costs are subject to approval by a majority of our Independent Trustees at least annually. We incurred shared services costs of $594 and $385 payable to Tremont for the three months ended September 30, 2022 and 2021, respectively, and $1,742 and $1,049 for the nine months ended September 30, 2022 and 2021, respectively. We include these amounts in reimbursement of shared services expenses or general and administrative expenses, as applicable, in our condensed consolidated statements of operations.
In connection with the Merger, TRMT terminated its management agreement with Tremont, and Tremont waived its right to receive payment of the termination fees that would have otherwise resulted due to the Merger. In consideration of this waiver, we agreed that, effective upon consummation of the Merger and the termination of TRMT's management agreement with Tremont, certain of the expenses Tremont had paid pursuant to its management agreement with TRMT will be included in the “Termination Fee” under and as defined in our existing management agreement with Tremont. See our 2021 Annual Report for further information regarding this waiver and change to the "Termination Fee" and the Merger.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

Note 8. Related Person Transactions
We have relationships and historical and continuing transactions with Tremont, RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. Tremont is a subsidiary of RMR, which is a majority owned subsidiary of RMR Inc., and RMR Inc. is the managing member of RMR. RMR provides certain shared services to Tremont that are applicable to us, and we reimburse Tremont or pay RMR for the amounts Tremont or RMR pays for those services. One of our Managing Trustees and Chair of our Board of Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and he is also a director of Tremont, the chair of the board of directors, a managing director and the president and chief executive officer of RMR Inc., and an officer and employee of RMR. Our other Managing Trustee, Matthew P. Jordan is an officer of RMR Inc. and an officer and employee of RMR, and our executive officers are officers of RMR and officers and employees of Tremont and/or RMR.
See Note 6 for information relating to the awards of our common shares we made in September 2022 to our officers and certain other employees of Tremont and/or RMR and common shares we purchased from certain of our current and former officers and employees of Tremont and/or RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We include amounts recognized as expense for awards of our common shares to our officers and employees of Tremont and/or RMR in general and administrative expenses in our condensed consolidated statements of operations.
Some of our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR or its subsidiaries provide management services. Adam D. Portnoy serves as the chair of the boards and as a managing director or managing trustee of those companies. Other officers of RMR and Tremont serve as managing trustees, managing directors or officers of certain of these companies.
Our Manager, Tremont Realty Capital LLC. We have a management agreement with Tremont to provide management services to us. See Note 7 for further information regarding our management agreement with Tremont. Tremont also provided management services to TRMT until the Merger. On May 11, 2022, Tremont purchased 882,407 of our common shares from Diane Portnoy, the mother of Adam D. Portnoy. Tremont paid an aggregate purchase price of $9,469 for these shares. As of September 30, 2022, Tremont owned 1,708,058 of our common shares, and Mr. Portnoy beneficially owned (including through Tremont) 13.4% of our outstanding common shares.
Tremont Mortgage Trust. TRMT merged with and into us on September 30, 2021. Prior to the Merger, Adam D. Portnoy and Matthew P. Jordan, our Managing Trustees, were also TRMT’s managing trustees. Thomas J. Lorenzini, our President, also served as president of TRMT, and G. Douglas Lanois, our then Chief Financial Officer and Treasurer, also served as chief financial officer and treasurer of TRMT. Three of our Independent Trustees, William A. Lamkin, Joseph L. Morea and Jeffrey P. Somers, previously served as independent trustees of TRMT. In addition, our former Independent Trustee, John L. Harrington, also previously served as an independent trustee of TRMT and he resigned both trusteeships effective as of the effective time of the Merger. See our 2021 Annual Report for further information regarding the Merger and the other Transactions.
For further information about these and other such relationships and certain other related person transactions, refer to our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and to our 2021 Annual Report.
Note 9. Income Taxes
We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the IRC. Accordingly, we generally are not, and will not be, subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We are subject to certain state and local taxes, certain of which amounts are or will be reported as income taxes in our condensed consolidated statements of operations.
Note 10. Weighted Average Common Shares
We calculate net income per common share - basic using the two class method. We calculate net income per common share - diluted using the more dilutive of the two class or treasury stock method. Unvested share awards and the related impact on earnings are considered when calculating net income per common share - basic and net income per common share - diluted.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

The calculation of basic and diluted earnings per shares is as follows (amounts in thousands, except per share data):
Three Months Ended September 30, Nine Months Ended September 30,
2022202120222021
Numerators:
Net income$5,176 $2,484 $20,880 $3,994 
Income attributable to unvested participating securities(33)— (133)— 
Net income used in calculating net income per common share$5,143 $2,484 $20,747 $3,994 
Denominators
Weighted average common shares outstanding - basic14,551 10,263 14,526 10,225 
Effect of dilutive securities: unvested share awards — 1 — — 
Weighted average common shares outstanding - diluted14,551 10,264 14,526 10,225 
Net income per common share - basic and diluted$0.35 $0.24 $1.43 $0.39 

Note 11. Commitments and Contingencies
As of September 30, 2022, we had unfunded loan commitments of $57,712 related to our loans held for investment that are not reflected in our condensed consolidated balance sheets. These unfunded loan commitments had a weighted average initial maturity of 1.8 years as of September 30, 2022. See Note 3 for further information related to our loans held for investment.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and in our 2021 Annual Report.
OVERVIEW (dollars in thousands, except share data)
We are a Maryland REIT. Our business strategy is focused on originating and investing in floating rate first mortgage loans secured by middle market and transitional CRE. We define middle market CRE as commercial properties that have values up to $100,000 and transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties. These mortgage loans are classified as loans held for investment in our condensed consolidated balance sheets. Loans held for investment are reported at cost, net of any unamortized loan fees, origination costs, premiums, discounts or reserves for loan losses, as applicable.

Tremont is registered with the Securities and Exchange Commission, or SEC, as an investment adviser under the Investment Advisers Act of 1940, as amended. We believe that Tremont provides us with significant experience and expertise in investing in middle market and transitional CRE.

We operate our business in a manner consistent with our qualification for taxation as a REIT under the IRC. As such, we generally are not subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act.

Non-GAAP Financial Measures

We present Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings, Adjusted Distributable Earnings per common share and Adjusted Book Value per common share, which are considered “non-GAAP financial measures” within the meaning of the applicable SEC rules. These non-GAAP financial measures do not represent net income, net income per common share or cash generated from operating activities and should not be considered as an alternative to net income or net income per common share determined in accordance with GAAP or as an indication of our cash flows from operations determined in accordance with GAAP, a measure of our liquidity or operating performance or an indication of funds available for our cash needs. In addition, our methodologies for calculating these non-GAAP financial measures may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures; therefore, our reported Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share may not be comparable to distributable earnings, distributable earnings per common share, adjusted distributable earnings and adjusted distributable earnings per common share, as reported by other companies.

We believe that Adjusted Book Value per common share is a meaningful measure of our capital adequacy because it excludes the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger. Adjusted Book Value per common share does not represent book value per common share or alternative measures determined in accordance with GAAP. Our methodology for calculating Adjusted Book Value per common share may differ from the methodologies employed by other companies to calculate the same or similar supplemental capital adequacy measures; therefore, our Adjusted Book Value per common share may not be comparable to the adjusted book value per common share reported by other companies.

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In order to maintain our qualification for taxation as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders. We believe that one of the factors that investors consider important in deciding whether to buy or sell securities of a REIT is its distribution rate. Over time, Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share may be useful indicators of distributions to our shareholders and are measures that are considered by our Board of Trustees when determining the amount of distributions. We believe that Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share provide meaningful information to consider in addition to net income, net income per common share and cash flows from operating activities determined in accordance with GAAP. These measures help us to evaluate our performance excluding the effects of certain transactions, the variability of any management incentive fees that may be paid or payable and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations. In addition, Distributable Earnings is used in determining the amount of base management and management incentive fees payable by us to Tremont under our management agreement.

Distributable Earnings and Adjusted Distributable Earnings

We calculate Distributable Earnings and Distributable Earnings per common share as net income and net income per common share, respectively, computed in accordance with GAAP, including realized losses not otherwise included in net income determined in accordance with GAAP, and excluding: (a) the management incentive fees earned by Tremont, if any; (b) depreciation and amortization, if any; (c) non-cash equity compensation expense; (d) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP), if any; and (e) one-time events pursuant to changes in GAAP and certain non-cash items, if any. Distributable Earnings are reduced for realized losses on loan investments when amounts are deemed uncollectable.
We define Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share as Distributable Earnings and Distributable Earnings per common share, respectively, excluding the effects of certain non-recurring transactions.
Reconciliation of Book Value per Common Share to Adjusted Book Value per Common Share
The table below calculates our book value per common share and demonstrates how we calculate Adjusted Book Value per common share:
September 30, 2022December 31, 2021
Shareholders' equity$268,409 $257,694 
Total outstanding common shares14,714 14,597 
Book value per common share18.24 17.65 
Unaccreted purchase discount per common share0.56 1.20 
Adjusted Book Value per common share (1)
$18.80 $18.85 
(1)Adjusted Book Value per common share is a non-GAAP financial measure that excludes the impact of the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger. The purchase discount of $36,443 was allocated to each acquired loan and is being accreted into income over the remaining term of the respective loan. As of September 30, 2022 and December 31, 2021, the unaccreted purchase discount was $8,224 and $17,391, respectively.

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Our Loan Portfolio
The table below details overall statistics for our loan portfolio as of September 30, 2022 and December 31, 2021:
As of September 30, 2022As of December 31, 2021
Number of loans2826
Total loan commitments$763,076$648,266
Unfunded loan commitments (1)
$57,712$57,772
Principal balance $705,460$590,590
Carrying value$695,154$570,780
Weighted average coupon rate6.59 %4.54 %
Weighted average all in yield (2)
7.10 %5.08 %
Weighted average floor0.55 %0.68 %
Weighted average maximum maturity (years) (3)
3.53.8
Weighted average risk rating2.92.9
Weighted average LTV (4)
68 %68 %
(1)    Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded over the term of the loan.
(2)    All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.
(3)    Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions.
(4)    LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing.

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Loan Portfolio Details
The table below details our loan portfolio as of September 30, 2022:
LocationProperty TypeOrigination DateCommitted Principal AmountPrincipal
Balance		Coupon Rate
All in
Yield (1)
Maximum Maturity
(date) (2)
LTV (3)
Risk Rating
First mortgage loans
St. Louis, MOOffice12/19/2018$29,500 $29,367 L + 3.25%L + 3.74%12/19/202372 %2
Yardley, PAOffice12/19/201916,500 15,251 L + 4.58%L + 6.15%12/19/202475 %4
Allentown, PAIndustrial01/24/20209,911 9,911 L + 3.50%L + 4.03%01/24/202567 %2
Dublin, OHOffice02/18/202022,820 22,507 S + 3.75%S + 4.95%02/18/202333 %2
Downers Grove, ILOffice09/25/202030,000 29,500 L + 4.25%L + 4.69%11/25/202467 %3
Los Angeles, CA (4)
Retail12/17/202024,600 22,061 L + 4.25%L + 5.02%12/17/202467 %2
Aurora, ILOffice / Industrial12/18/202017,460 15,299 L + 4.35%L + 5.03%12/18/202473 %2
Olmsted Falls, OHMultifamily01/28/202154,575 46,084 L + 4.00%L + 4.64%01/28/202663 %3
Colorado Springs, COOffice / Industrial04/06/202135,000 30,210 L + 4.50%L + 5.05%04/06/202573 %2
Westminster, COOffice05/25/202115,250 14,020 L + 3.75%L + 4.19%05/25/202666 %2
Plano, TXOffice07/01/202127,385 25,781 L + 4.75%L + 5.17%07/01/202678 %3
Portland, ORMultifamily07/09/202119,687 19,687 L + 3.57%L + 3.97%07/09/202675 %3
Portland, ORMultifamily07/30/202113,400 13,400 L + 3.57%L + 3.98%07/30/202671 %4
Seattle, WAMultifamily08/16/202112,500 12,317 L + 3.55%L + 3.89%08/16/202670 %3
Dallas, TXOffice08/25/202150,000 43,450 L + 3.25%L + 3.61%08/25/202672 %4
Sandy Springs, GARetail09/23/202116,488 15,017 L + 3.75%L + 4.11%09/23/202672 %3
Carlsbad, CAOffice10/27/202124,750 23,825 L + 3.25%L + 3.58%10/27/202678 %3
Bellevue, WAOffice11/05/202121,000 20,000 L + 3.85%L + 4.19%11/05/202668 %3
Ames, IAMultifamily11/15/202118,000 17,820 L + 3.80%L + 4.13%11/15/202671 %2
Downers Grove, ILOffice12/09/202123,530 23,530 L + 4.25%L + 4.57%12/09/202672 %3
West Bloomfield, MIRetail12/16/202142,500 37,453 L + 3.85%L + 4.66%12/16/202459 %3
Summerville, SCIndustrial12/20/202135,000 35,000 L + 3.50%L + 3.82%12/20/202670 %2
Delray Beach, FLRetail03/18/202216,000 14,833 S + 4.25%S + 4.92%03/18/202656 %3
Starkville, MSMultifamily03/22/202237,250 36,599 S + 4.00%S + 4.33%03/22/202770 %4
Brandywine, MDRetail03/29/202242,500 42,200 S + 3.85%S + 4.25%03/29/202762 %3
Farmington Hills, MIMultifamily05/24/202231,520 28,520 S + 3.15%S + 3.50%05/24/202775 %3
Las Vegas, NVMultifamily06/10/202228,950 23,378 S + 3.30%S + 4.07%06/10/202760 %3
Passaic, NJIndustrial09/08/202247,000 38,440 S + 3.85%S + 4.22%09/08/202769 %3
Total/weighted average$763,076 $705,460 + 3.83%+ 4.34%68 %2.9
(1)All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.
(2)Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions.
(3)    LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing.
(4)    This loan was repaid in October 2022.
As of September 30, 2022, we had $763,076 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 28 first mortgage loans. As of September 30, 2022, we had four loans representing approximately 15% of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk”.

All of the loans in our portfolio are structured with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses. In addition, we continue to actively engage with our borrowers regarding their execution of the business plans for the underlying collateral, among other things.

As of September 30, 2022 and October 24, 2022, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.

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We did not have any impaired loans, non-accrual loans or loans in default as of September 30, 2022; thus, we did not record a reserve for loan loss as of that date. However, our borrowers' businesses, operations and liquidity may be materially adversely impacted by the ongoing impact of the COVID-19 pandemic, inflationary pressures, rising interest rates, supply chain issues and any recession or economic downturn. As a result, they may become unable to pay their debt service obligations owed and due to us, which may result in the impairment of those loans, and our recording loan loss reserves with respect to those loans and recording of any income with respect to those loans on a nonaccrual basis. For further information regarding our loan portfolio, risks relating to the COVID-19 pandemic and current economic conditions on us and our business, see Note 3 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, "—Factors Affecting our Operating Results" and "Warning Concerning Forward-Looking Statements" elsewhere in this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item 1A, “Risk Factors”, of our 2021 Annual Report.
Financing Activities
On March 11, 2022, one of our wholly owned subsidiaries entered into our Wells Fargo Master Repurchase Agreement for the Wells Fargo Master Repurchase Facility. The Wells Fargo Master Repurchase Facility provides up to $125,000 in advances, with an option to increase the maximum facility to $250,000, subject to certain terms and conditions. We expect to use the Wells Fargo Master Repurchase Facility to finance the acquisition or origination of floating rate commercial mortgage loans. The expiration date of the Wells Fargo Master Repurchase Agreement is March 11, 2025, unless extended or earlier terminated in accordance with the terms of the Wells Fargo Master Repurchase Agreement.

On March 15, 2022, we amended and restated our Citibank Master Repurchase Agreement, which governs the Citibank Master Repurchase Facility. The amended and restated Citibank Master Repurchase Agreement extended the stated maturity date of the Citibank Master Repurchase Facility to March 15, 2025, and made certain other changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the Citibank Master Repurchase Facility and modifying certain pricing terms.

On April 25, 2022, we amended and restated our BMO Loan Program Agreement, which increased the maximum facility amount from $100,000 to $150,000.

On May 4, 2022, we amended and restated our UBS Master Repurchase Agreement. The amended and restated UBS Master Repurchase Agreement, which was effective March 9, 2022, made certain changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the UBS Master Repurchase Facility and modifying certain pricing terms.

For further information regarding our Secured Financing Facilities, see Note 4 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The table below is an overview of our Secured Financing Facilities as of September 30, 2022:
Secured Financing FacilityMaturity DatePrincipal BalanceUnused CapacityMaximum Facility Size
Collateral Principal Balance
Citibank Master Repurchase Facility03/15/2025$160,206 $54,794 $215,000 $220,192 
UBS Master Repurchase Facility02/18/2024167,094 24,906 192,000 226,082 
BMO FacilityVarious111,105 38,895 150,000 148,476 
Wells Fargo Master Repurchase Facility03/11/202567,426 57,574 125,000 88,649 
Total$505,831 $176,169 $682,000 $683,399 
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The table below details our Secured Financing Facilities activities during the three months ended September 30, 2022:

Carrying Value
Balance at June 30, 2022$452,705 
Borrowings60,919 
Repayments(10,132)
Deferred fees(288)
Amortization of deferred fees310 
Balance at September 30, 2022$503,514 

The table below details our Secured Financing Facilities activities during the nine months ended September 30, 2022:
Carrying Value
Balance at December 31, 2021$339,627 
Borrowings284,867 
Repayments(119,905)
Deferred fees(1,859)
Amortization of deferred fees784 
Balance at September 30, 2022$503,514 
As of September 30, 2022, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 4.89% per annum, excluding associated fees and expenses. As of September 30, 2022 and October 24, 2022, we had a $505,831 aggregate outstanding principal balance under our Secured Financing Facilities.
As of September 30, 2022, we were in compliance with all covenants and other terms under our Secured Financing Facilities.
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RESULTS OF OPERATIONS (amounts in thousands, except per share data)
Three Months Ended September 30, 2022 Compared to Three Months Ended June 30, 2022:

Three Months Ended
September 30, 2022June 30, 2022Change% Change
INCOME FROM INVESTMENTS:
Interest income from investments$11,650 $8,869 $2,781 31.4 %
Purchase discount accretion1,596 1,636 (40)(2.4 %)
Less: interest and related expenses (5,447)(3,007)(2,440)81.1 %
Income from investments, net7,799 7,498 301 4.0 %
OTHER EXPENSES:
Base management fees 1,064 1,063 1 0.1 %
General and administrative expenses1,016 1,378 (362)(26.3 %)
Reimbursement of shared services expenses520 440 80 18.2 %
Total expenses2,600 2,881 (281)(9.8 %)
Income before income taxes5,199 4,617 582 12.6 %
Income tax expense(23)(39)16 (41.0 %)
Net income$5,176 $4,578 $598 13.1 %
Weighted average common shares outstanding - basic and diluted14,551 14,521 30 0.2 %
Net income per common share - basic and diluted$0.35 $0.31 $0.04 12.9 %

Interest income from investments. The increase in interest income from investments was primarily the result of higher benchmark interest rates. The weighted average benchmark interest rate was 2.76% as of September 30, 2022 as compared to 1.32% as of June 30, 2022.

Purchase discount accretion. The fair value of the loans acquired in the Merger exceeded the purchase price of the loans. In accordance with GAAP, a purchase discount was recorded for the difference between the fair value and purchase price of the loans acquired. The purchase discount was allocated to each acquired TRMT loan and is being accreted into income over the remaining term of the respective loan.

Interest and related expenses. The increase in interest and related expenses was primarily the result of higher benchmark interest rates. The weighted average benchmark interest rate was 2.96% as of September 30, 2022 as compared 1.47% as of June 30, 2022.

General and administrative expenses. The decrease in general and administrative expenses was primarily due to decreases in share based compensation and professional fees during the three months ended September 30, 2022 as compared to the three months ended June 30, 2022.
Reimbursement of shared services expenses. Reimbursement of shared services expenses represents reimbursement of the costs for the services that Tremont arranges on our behalf from RMR. The increase in reimbursement of shared services expenses was primarily the result of an adjustment to our estimate of costs for the usage of shared services from RMR.
Income tax expense. Income tax expense represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.
Net income. The increase in net income was due to the changes noted above.
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Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021:
Nine Months Ended September 30,
20222021Change% Change
INCOME FROM INVESTMENTS:
Interest income from investments$30,098 $9,566 $20,532 214.6 %
Purchase discount accretion9,167 — 9,167 n/m
Less: interest and related expenses (10,191)(680)(9,511)n/m
Income from investments, net29,074 8,886 20,188 227.2 %
OTHER EXPENSES:
Base management fees 3,190 2,167 1,023 47.2 %
General and administrative expenses3,340 1,739 1,601 92.1 %
Reimbursement of shared services expenses1,520 950 570 60.0 %
Other transaction related costs37 — 37 n/m
Total expenses8,087 4,856 3,231 66.5 %
Income before income taxes20,987 4,030 16,957 420.8 %
Income tax expense(107)(36)(71)197.2 %
Net income$20,880 $3,994 $16,886 422.8 %
Weighted average common shares outstanding - basic and diluted14,526 10,225 4,301 42.1 %
Net income per common share - basic and diluted$1.43 $0.39 $1.04 266.7 %
n/m - not meaningful

Interest income from investments. The increase in interest income from investments was primarily the result of interest income generated from the 12 loans originated since October 1, 2021, higher benchmark interest rates since October 1, 2021 and prepayment premiums and accelerated amortization of deferred fees on two loans repaid during the nine months ended September 30, 2022 of $2,402.

Purchase discount accretion. The fair value of the loans acquired in the Merger on September 30, 2021 exceeded the purchase price of the loans. In accordance with GAAP, a purchase discount was recorded for the difference between the fair value and purchase price of the loans acquired. The purchase discount was allocated to each acquired TRMT loan and is being accreted into income over the remaining term of the respective loan.

Interest and related expenses. The increase in interest and related expenses was primarily the result of an increase in advances made to us under our Secured Financing Facilities and higher weighted average interest rates of 2.91% for the nine months ended September 30, 2022 as compared to 0.62% for the nine months ended September 30, 2021.
Base management fees. The increase in base management fees was primarily due to the Merger. As a result of the Merger, the net book value of TRMT, as of September 30, 2021, was included as "Equity" for purposes of determining the base management fee and incentive fee, if any, under the management agreement.

General and administrative expenses. The increase in general and administrative expenses was primarily due to increases in share based compensation, fees paid to our Trustees for their services, professional fees and insurance costs during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Reimbursement of shared services expenses. Reimbursement of shared services expenses represents reimbursement of the costs for the services that Tremont arranges on our behalf from RMR. The increase in reimbursement of shared services expenses was primarily the result of increased usage of shared services after the Merger on September 30, 2021.
Other transaction related costs. Other transaction related costs primarily consisted of audit fees related to the Merger during the nine months ended September 30, 2022.
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Income tax expense. Income tax expense represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.
Net income. The increase in net income was due to the changes noted above.
Reconciliation of Net Income to Distributable Earnings and Adjusted Distributable Earnings
The table below demonstrates how we calculate Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share, which are non-GAAP measures, and provides a reconciliation of these non-GAAP measures to net income:

Three Months Ended Nine Months Ended
September 30, 2022June 30,
2022		September 30, 2022September 30, 2021
Net income$5,176 $4,578 $20,880 $3,994 
Non-cash equity compensation expense259 548 889 181 
Non-cash accretion of purchase discount(1,596)(1,636)(9,167)— 
Exit fees collected on loans acquired in Merger (1)
104 — 104 — 
Distributable Earnings3,943 3,490 12,706 4,175 
Other transaction related costs (2)
— — 37 — 
Adjusted Distributable Earnings$3,943 $3,490 $12,743 $4,175 
Weighted average common shares outstanding - basic and diluted14,551 14,521 14,526 10,225 
Net income per common share - basic and diluted$0.35 $0.31 $1.43 $0.39 
Distributable Earnings per common share - basic and diluted$0.27 $0.24 $0.87 $0.41 
Adjusted Distributable Earnings per common share - basic and diluted$0.27 $0.24 $0.88 $0.41 

(1)Exit fees collected on loans acquired in the Merger represent fees collected upon repayment of loans for which no income has previously been recognized in Distributable Earnings. In accordance with GAAP, exit fees on loans acquired in the Merger were accreted as a component of the purchase discount and were excluded from Distributable Earnings as a non-cash item. Accordingly, these exit fees have been recognized in Distributable Earnings upon collection.
(2)Other transaction related costs for the nine months ended September 30, 2022 include expenses related to the Merger.

Factors Affecting Operating Results

Our results of operations are impacted by a number of factors and primarily depend on the interest income from our investments and the financing and other costs associated with our business. Our operating results are also impacted by general CRE market conditions and unanticipated defaults by our borrowers. For further information regarding the risks associated with our loan portfolio, see Note 3 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 and elsewhere in this Management Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors" of our 2021 Annual Report.

Credit Risk. We are subject to the credit risk of our borrowers in connection with our investments. We seek to mitigate this risk by utilizing a comprehensive underwriting, diligence and investment selection process and by ongoing monitoring of our investments. Nevertheless, unanticipated credit losses could occur that may adversely impact our operating results.

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Changes in Fair Value of our Assets. We generally intend to hold our investments for their contractual terms, unless repaid earlier by the borrowers. We evaluate our investments for impairment at least quarterly. Impairments occur when it is probable that we will not be able to collect all amounts due according to the applicable contractual terms. If we determine that a loan is impaired, we will record a reserve to reduce the carrying value of the loan to an amount that takes into account both the present value of expected future cash flows discounted at the loan's contractual effective interest rate and the fair value of any available collateral, net of any costs we expect to incur to realize that value.

Availability of Leverage and Equity. We use leverage to make additional investments that may increase our returns. We may not be able to obtain the expected amount of leverage we desire or its cost may exceed our expectation and, consequently, the returns generated from our investments may be reduced. Our ability to further grow our loan portfolio over time will depend, to a significant degree, upon our ability to obtain additional capital. However, our access to additional capital depends on many factors including the price at which our common shares trade relative to their book value and market lending conditions. See "—Market Conditions" below.
Market Conditions. Investor demand for CRE assets, historically low interest rates and strong property fundamentals resulted in both increased CRE valuations and transaction volumes. These trends continued into 2022; however, inflationary pressures and geopolitical concerns have caused widespread macroeconomic uncertainty and volatility. In response to inflationary pressures, the Federal Open Market Committee of the U.S. Federal Reserve (the "FOMC") increased the federal funds rate by 300 basis points over five consecutive meetings from March 2022 to September 2022, a pace not seen since the FOMC began setting target federal funds rates as a means of implementing monetary policy in 1990, and has signaled that further increases are likely to occur. The FOMC's actions have caused increased borrowing costs and volatility in the CRE debt markets, while concerns of an existing or possible recession have caused increased credit spreads. Combined, these factors are resulting in tighter underwriting standards and have caused some buyers to seek to reprice, or in some circumstances, cancel pending transactions entirely. As a result, CRE transaction total volume for the third quarter of 2022 has slowed considerably.
The CRE industry is traditionally a lagging indicator of economic conditions and CRE assets have historically tended to perform well in periods of inflation. Despite the recent increase in borrowing costs and macroeconomic and geopolitical uncertainties, we believe that CRE investors continue to see strength in the fundamentals of the U.S. CRE markets. We believe that we are in a period of price resetting, as buyers and sellers of CRE assets recalibrate their expectations and CRE investors and lenders reprice and reconsider risk in the increasing interest rate environment. Some investors have in the past viewed CRE as a hedge against inflation, with long term earnings potential from rent growth resulting from continued demand for certain CRE asset classes, such as rental housing and industrial space, and acquisition and financing opportunities may continue to exist for borrowers able to accept higher borrowing costs.
As it relates to the CRE debt markets, many CRE debt providers have become less willing, or able, to extend credit to borrowers, and those that are extending credit are doing so at lower leverage levels and with higher credit spreads. Market volatility and the increase in interest rates has not affected all lenders equally. Banks and life insurance companies have reduced their leverage ratios and increased credit spreads, but continue to originate new loans, while lenders that rely on secondary markets to finance their lending activities have experienced greater challenges. Credit spreads in the secondary market for commercial mortgage-backed securities, or CMBS, and CRE collateralized loan obligations, or CLO, bonds have widened substantially due to competing demand for alternative fixed income investments. As a result, some lenders who originate and sell loans into the CRE CLO market as a means of financing have been forced to sell their loans at a discount or have chosen to wait until market volatility subsides and credit spreads stabilize, causing a slowdown in loan originations.
In addition to increased overall borrowing costs, lenders may experience challenges due to increasing interest rates on floating rate loan portfolios. Floating rate loans are often used to finance transitional properties with a business plan to increase cash flows, allowing for increasing debt costs to be serviced. Lenders are impacted by the ability of their borrowers to service their debt while implementing their business plans and, as a result, lenders' underwriting criteria may become more conservative. Additionally, floating rate lenders typically limit interest rate risk by requiring borrowers to obtain interest rate caps or swaps to limit the impact of rising rates on a property’s ability to service its debt. While interest rate caps and swaps on existing loans protect lenders in periods of rising interest rates, the cost to the borrower to obtain interest rate caps or swaps on new loans may result in decreased loan amounts.
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We believe the CRE lending industry is well positioned to face these challenges. Unlike in the years leading up to the financial crisis of 2008, underwriting standards have remained consistent and there continues to be significant sources of liquidity, both in the form of debt and equity capital, for the CRE sector. We believe there will continue to be significant opportunities for alternative lenders like us to provide creative, flexible debt capital for a wide array of circumstances and business plans.
Changes in Market Interest Rates. With respect to our business operations, increases in interest rates, in general, may cause: (a) the interest expense associated with our variable rate borrowings, to increase; (b) the value of our fixed rate investments, if any, to decline; (c) the coupon rates on our variable rate investments to reset, perhaps on a delayed basis, to higher rates; and (d) it to become more difficult and costly for our borrowers, which may negatively impact their ability to repay our investments. See "—Market Conditions" above for a discussion of the current market including interest rates.

Conversely, decreases in interest rates, in general, may cause: (a) the interest expense associated with our variable rate borrowings, to decrease; (b) the value of our fixed rate investments, if any, to increase; (c) the coupon rates on our variable rate investments to reset, perhaps on a delayed basis, to lower rates; and (d) it to become easier and more affordable for our borrowers to refinance, and as a result, repay our loans, but may negatively impact our future returns if any such repayment proceeds were to be reinvested in lower yielding investments.
The interest income on our loans and interest expense on our borrowings float with benchmark rates, such as LIBOR and SOFR. Because we generally intend to leverage approximately 75% of the amount of our investments, as benchmark rates increase above the floors of our loans, our income from investments, net of interest and related expenses, will increase. Decreases in benchmark rates are mitigated by interest rate floor provisions in all but one of our loan agreements with borrowers; therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in benchmark rates. As of September 30, 2022, LIBOR and SOFR were 3.14% and 3.04%, respectively, which exceeds the floors established by all of our loans, and as a result none of our loan investments currently have active interest rate floors.
Interest rates under our loan agreements with borrowers entered into prior to January 1, 2022 have been or are expected to be amended to replace LIBOR with SOFR prior to June 30, 2023, the date LIBOR is expected to no longer be available. Since January 1, 2022, interest rates under our new loan agreements with borrowers are based on SOFR. Our Citibank Master Repurchase Agreement and UBS Master Repurchase Agreement were amended and restated effective March 2022 to, among other things, replace LIBOR with SOFR for interest rate calculations on new advances. Interest rates on advances under our BMO Facility and Wells Fargo Master Repurchase Facility have been based on SOFR since we entered into the agreements governing these facilities.

Size of Portfolio. The size of our loan portfolio, as measured both by the aggregate principal balance and the number of our CRE loans and our other investments, is also an important factor in determining our operating results. Generally, if the size of our loan portfolio grows, the amount of interest income we receive would increase and we may achieve certain economies of scale and diversify risk within our loan portfolio. A larger portfolio, however, may result in increased expenses; for example, we may incur additional interest expense or other costs to finance our investments. Also, if the aggregate principal balance of our loan portfolio grows but the number of our loans or the number of our borrowers does not grow, we could face increased risk by reason of the concentration of our investments.

LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share data)
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to fund our lending commitments, repay or meet margin calls resulting from our borrowings, if any, fund and maintain our assets and operations, make distributions to our shareholders and fund other business operating requirements. Our sources of cash flows include cash on hand, payments of principal, interest and fees we receive on our investments, other cash we may generate from our business and operations and any unused borrowing capacity, including under our Secured Financing Facilities or other repurchase agreements or financing arrangements we may obtain, which may also include bank loans or public or private issuances of debt or equity securities. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay our debt service obligations owed and make any distributions to our shareholders for the next 12 months and for the foreseeable future. For further information regarding the risks associated with our loan portfolio, see Note 3 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 and elsewhere in this Management Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors" of our 2021 Annual Report.

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Pursuant to the terms of our UBS Master Repurchase Facility and our Citibank Master Repurchase Facility, we may sell to, and later repurchase from, UBS and Citibank, the purchased assets related to the applicable facility. The initial purchase price paid by UBS or Citibank of each purchased asset is up to 75% of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to UBS’s or Citibank's approval. Upon the repurchase of a purchased asset, we are required to pay UBS or Citibank, as applicable, the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of UBS or Citibank, as applicable, relating to such purchased asset. The interest rate relating to an existing UBS purchased asset is equal to one month LIBOR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral. The interest rates related to our Citibank and UBS purchased assets were amended earlier this year as part of the amendments to the Citibank Master Repurchase Agreement and UBS Master Repurchase Agreement to replace one month LIBOR with one month SOFR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral. UBS and Citibank each has the discretion to make advancements at margins higher than 75%.

Loans issued under the BMO Facility are coterminous with the corresponding pledged mortgage loan investments, are not subject to margin calls and allow for up to an 80% advance rate, subject to certain loan to cost and LTV limits. Interest on advancements under the BMO Facility are calculated at SOFR plus a premium. Loans issued under the BMO Facility are secured by a security interest and collateral assignment of the underlying loans to our borrowers which are secured by real property underlying such loans. We are required to pay an upfront fee equal to a percentage of the aggregate amount of the facility loan, such percentage to be determined at the time of approval of the separate facility loan agreements with BMO, or the BMO Facility Loan Agreements.

On March 11, 2022, one of our wholly owned subsidiaries entered into the Wells Fargo Master Repurchase Agreement for the Wells Fargo Master Repurchase Facility, pursuant to which we may sell to, and later repurchase from Wells Fargo, the purchased assets related to the facility. The initial purchase price paid by Wells Fargo for each purchased asset is up to 75% or 80%, depending on the property type of the purchased asset’s real estate collateral, of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, and subject to Wells Fargo’s approval. Upon the repurchase of a purchased asset, we are required to pay Wells Fargo the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Wells Fargo relating to such purchased asset. Interest on advancements under the Wells Fargo Master Repurchase Facility is calculated at SOFR plus a premium.

For further information regarding our Secured Financing Facilities, see Note 4 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q and "—Overview-Financing Activities" above.

The table below is a summary of our sources and uses of cash flows for the periods presented:
Nine Months Ended September 30,
20222021
Cash, cash equivalents and restricted cash at beginning of period$26,295 $103,564 
Net cash provided by (used in):
Operating activities9,963 1,297 
Investing activities(111,870)(167,104)
Financing activities152,049 82,090 
Cash, cash equivalents and restricted cash at end of period$76,437 $19,847 

The increase in cash provided by operating activities for the 2022 period compared to the 2021 period was primarily the result of our origination activities. As of September 30, 2022, we have increased the size of our loan portfolio from 22 to 28 loans since October 1, 2021. The decrease in cash used in investing activities is primarily due to higher repayment of loans in the 2022 period and payment of transaction costs related to the Merger in the 2021 period, partially offset by cash assumed in the Merger. The increase in cash used in financing activities is primarily due to increased proceeds received from our Secured Financing Facilities during the 2022 period, partially offset by repayments on our Secured Financing Facilities and an increase in distributions to our common shareholders for the 2022 period.
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Distributions
During the nine months ended September 30, 2022, we paid distributions to our common shareholders totaling $10,958, or $0.75 per common share, using cash on hand.
On October 13, 2022, we declared a quarterly distribution of $0.25 per common share, or $3,677, to shareholders of record on October 24, 2022. We expect to pay this distribution to our common shareholders on or about November 17, 2022 using cash on hand.
For further information regarding distributions, see Note 6 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of September 30, 2022 were as follows:
Payment Due by Period
TotalLess than 1 Year1 - 3 Years3 - 5 YearsMore than 5 years
Unfunded loan commitments (1)
$57,712 $3,081 $54,631 $— $— 
Principal payments on Secured Financing Facilities (2)
505,831 45,380 460,451 — — 
Interest payments (3)
43,250 23,551 19,699 — — 
$606,793 $72,012 $534,781 $— $— 
(1)The allocation of our unfunded loan commitments is based on the current loan maturity date to which the individual commitments relate.
(2)The allocation of outstanding advancements under our Secured Financing Facilities is based on the earlier of the current maturity date of each loan investment with respect to which the individual borrowing relates or the maturity date of the respective Secured Financing Facilities.
(3)Projected interest payments are attributable only to our debt service obligations at existing rates as of September 30, 2022 and are not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates.
Debt Covenants

Our principal debt obligations as of September 30, 2022 were the outstanding balances under our Secured Financing Facilities. The agreements governing our Master Repurchase Facilities, or our Master Repurchase Agreements, provide for acceleration of the date of repurchase of any then purchased assets and the liquidation of the purchased assets by UBS, Citibank or Wells Fargo, as applicable, upon the occurrence and continuation of certain events of default, including a change of control of us, which includes Tremont ceasing to act as our sole manager or to be a wholly owned subsidiary of RMR. Our Master Repurchase Agreements also provide that upon the repurchase of any then purchased asset, we are required to pay UBS, Citibank or Wells Fargo the outstanding purchase price of such purchased asset and accrued interest and any and all accrued and unpaid expenses of UBS, Citibank or Wells Fargo, as applicable, relating to such purchased asset.
In connection with our Master Repurchase Agreements, we entered into our guarantees, or the Master Repurchase Guarantees, which require us to guarantee 25% of the aggregate repurchase price and 100% of losses in the event of certain bad acts, as well as any costs and expenses of UBS, Citibank and Wells Fargo, as applicable, related to our Master Repurchase Agreements. The Master Repurchase Guarantees contain financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity and a minimum interest coverage ratio and to satisfy a total indebtedness to stockholders' equity ratio.
In connection with the BMO Loan Program Agreement, we have agreed to guarantee certain of the obligations under the BMO Loan Program Agreement and the BMO Facility Loan Agreements pursuant to a limited guaranty from us to and for the benefit of the administrative agent for itself and such other lenders, or the BMO Guaranty. Specifically, the BMO Guaranty requires us to guarantee 25% of the then current outstanding principal balance of the facility loans and 100% of losses or the entire indebtedness in the event of certain bad acts as well as any costs and expenses of the administrative agent or lenders related to the BMO Loan Program Agreement. In addition, the BMO Guaranty contains financial covenants that require us to maintain a minimum tangible net worth and a minimum liquidity and to satisfy a total indebtedness to stockholders’ equity ratio. The BMO Loan Program Agreement and the BMO Guaranty contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types.
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As of September 30, 2022, we had a $394,726 aggregate outstanding principal balance under our Master Repurchase Facilities. Our Master Repurchase Agreements are structured with risk mitigation mechanisms, including a cash flow sweep, which would allow UBS, Citibank and Wells Fargo, as applicable, to control interest payments from our borrowers under our loans that are financed under our respective Master Repurchase Facilities, and the ability to accelerate dates of repurchase and institute margin calls, which may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facilities.
As of September 30, 2022, we had a $111,105 aggregate outstanding principal balance under the BMO Facility.
As of September 30, 2022, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

Related Person Transactions
We have relationships and historical and continuing transactions with Tremont, RMR, RMR Inc. and others related to them. For further information about these and other such relationships and related person transactions, see Notes 7 and 8 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2021 Annual Report, our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our 2021 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR, Tremont or their respective subsidiaries provide management services.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, our President and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Warning Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:
•Our expectations about our borrowers’ business plans and their abilities to successfully execute them;

•Our expectations regarding the diversity and other characteristics of our loan portfolio;
•Our ability to carry out our business strategy and take advantage of opportunities for our business that we believe exist;
•Our expectations of the impact of inflation, geopolitical risk, rising interest rates and existing or possible economic recession on the CRE lending market, us and our borrowers;
•Our expectations of the market demand for CRE debt and the volume of transactions and opportunities that will exist in the CRE debt market, including the middle market;

•Our ability to utilize our existing available Secured Financing Facilities and to obtain additional capital to enable us to attain our target leverage, to make additional investments and to increase our potential returns;

•Market changes arising during or in response to the COVID-19 pandemic and the extent to which they may continue;

•Our ability to pay distributions to our shareholders and to increase and sustain the amount of such distributions;

•Our operating and investment targets, investment and financing strategies and leverage policies;
•Our expected operating results;
•The amount and timing of cash flows we receive from our investments;
•The ability of Tremont to make suitable investments for us, to monitor, service and administer our existing investments and to otherwise implement our investment strategy;
•Our ability to maintain and increase the net interest spread between the interest we earn on our investments and the interest we pay on our borrowings;

•Our belief that there will be significant opportunities for us to provide creative, flexible debt capital for a wide array of circumstances and business plans and our ability to successfully act on those opportunities and to benefit as a result;

•Our belief that we are well positioned to lend to private equity sponsors of middle market and transitional CRE assets;

•The origination, extension, exit, prepayment or other fees we may earn from our investments;
•Yields that may be available to us from mortgages on middle market and transitional CRE;
•The duration and other terms of our loan agreements with borrowers;
•The credit qualities of our borrowers;
•The ability and willingness of our borrowers to repay our investments in a timely manner or at all;
•Our projected leverage;
•The cost and availability of additional advancements under our Secured Financing Facilities or other debt financing we may obtain;
•Our qualification for taxation as a REIT;
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•Our ability to maintain our exemption from registration under the 1940 Act;
•Our understanding of the competitive nature of our industry and our ability to successfully compete under such circumstances;
•Market trends in our industry or with respect to interest rates, real estate values, the debt securities markets or the economy generally; and
•Regulatory requirements and the effect they may have on us or our competitors.
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, financial condition, liquidity, results of operations, cash flows, prospects and ability to make distributions include, but are not limited to:
•The impact of conditions in the economy, the CRE industry and the capital markets on us and our borrowers;
•Competition within the CRE lending industry;
•Changes in the availability, sourcing and structuring of CRE lending;
•Defaults by our borrowers;
•Compliance with, and changes to, federal, state or local laws or regulations, accounting rules, tax laws or similar matters;
•Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes;

•Actual and potential conflicts of interest with our related parties, including our Managing Trustees, Tremont, RMR, and others affiliated with them; and
•Acts of terrorism, war, pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control.
For example:
•We have a limited operating history originating and investing in first mortgage loans secured by middle market and transitional CRE and we may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our shareholders;
•To make additional investments and continue to grow our business after we invest our existing available capital, we will need to obtain additional cost-effective capital. We cannot be sure that we will be successful in obtaining any such additional capital. If we are unable to obtain such additional capital, we may not be able to further grow our business by making additional investments;
•Our distributions and distribution rate are set from time to time by our Board of Trustees. The timing, amount and form of future distributions will be determined at the discretion of our Board of Trustees and will depend upon various factors that our Board of Trustees deems relevant, including our historical and projected income, our Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share, the then current and expected needs and availability of cash to pay our obligations and fund our investments, distributions which may be required to be paid by us to maintain our qualification for taxation as a REIT, limitations on distributions contained in our financing arrangements and other factors deemed relevant by our Board of Trustees in its discretion. Accordingly, our future distribution rates may be increased or decreased and we can provide no assurances as to the rate at which future distributions will be paid;

•Competition may limit our ability to identify and make desirable investments with any additional capital we may obtain or with any proceeds we may receive from repayments of our investments;

•Our belief that there will be strong demand for alternative sources of CRE debt capital;
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•The value of our loans depends upon our borrowers’ ability to generate cash flows from operating the underlying collateral for our loans. Our borrowers may not have sufficient cash flows to repay our loans according to their terms, which may result in delinquency and foreclosure on our loans;
•Our investments contain certain risk mitigation mechanisms that may help protect us against investment losses by mitigating the impact from our borrowers being unable to pay their debt service obligations owed to us as scheduled for a temporary period. However, these mechanisms may not adequately cover the debt service amount and will likely not be able to fully fund the debt service obligations owed to us if the tenants’ businesses fail or they default on their debt service obligations owed to us;
•Current inflationary pressures, rising interest rates, supply chain issues, geopolitical risks and possible economic recession may adversely impact our borrowers' businesses and their ability and willingness to fund their obligations to us. As a result, we may not have sufficient capital to fund our debt obligations or to satisfy any margin calls or other commitments we may have under our Secured Financing Facilities, including as a result of any actions that our lenders under our Master Repurchase Facilities may take if our borrowers default on their loan obligations to us or the value of our collateral that secures those loans declines below required levels;

•Prepayment of our loans may adversely affect the value of our loan portfolio and our ability to make or sustain distributions to our shareholders;
•Loans secured by properties in transition involve a greater risk of loss than loans secured by stabilized properties;
•Tremont and RMR have limited historical experience managing or servicing mortgage REITs;
•We may incur significant debt, and our governing documents contain no limit on the amount of debt we may incur;
•Although, to date, we have not received a margin call under our Master Repurchase Agreements, these lenders may do so in the future in accordance with such agreements;
•Continued availability of additional advancements under our Secured Financing Facilities is subject to the available liquidity of our lenders, our lenders' willingness to lend, our ability to identify suitable loans to invest in and our satisfying certain financial covenants and other conditions, as applicable, that we may be unable to satisfy;
•Financing for floating rate mortgages and other related assets that we may seek to sell pursuant to our Secured Financing Facilities is subject to approval by those lenders, whose approval we may not obtain;
•The phase out of LIBOR could negatively impact our investments and our debt financing arrangements;
•Actual costs under our Secured Financing Facilities and our other debt facilities will be higher than the applicable benchmark interest rate plus a premium because of fees and expenses associated with our debt;
•We are dependent upon Tremont, its affiliates and their personnel. We may be unable to find suitable replacements if our management agreement is terminated;
•We believe that our relationships with our related parties, including our Managing Trustees, Tremont, RMR and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize;
•Our intention to remain exempt from registration under the 1940 Act imposes limits on our operations, and we may fail to remain exempt from registration under the 1940 Act; and
• Our failure to remain qualified for taxation as a REIT could have significant adverse consequences.
Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, pandemics, such as a continuation of the COVID-19 pandemic, inflation, recession or economic downturn, war, geopolitical risks, natural disasters, global climate change, changes in our borrowers' financial conditions or changes in capital markets or the economy generally.

The information contained elsewhere in this Quarterly Report on Form 10-Q and our 2021 Annual Report, or in our other filings with the SEC, including under the caption “Risk Factors”, herein or therein, or incorporated herein or therein, identifies
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other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov.
You should not place undue reliance upon our forward-looking statements.
Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
Statement Concerning Limited Liability
The Declaration of Trust of Seven Hills Realty Trust, a copy of which, together with any amendments or supplements thereto, is duly filed with the State Department of Assessments and Taxation of Maryland, provide that the name Seven Hills Realty Trust refers to the trustees collectively as trustees, but not individually or personally. No trustee, officer, shareholder, employee or agent of Seven Hills Realty Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Seven Hills Realty Trust. All persons or entities dealing with Seven Hills Realty Trust, in any way, shall look only to the assets of Seven Hills Realty Trust for the payment of any sum or the performance of any obligation.

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Part II. Other Information
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our 2021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities. The table below provides information about our purchases of our equity securities during the quarter ended September 30, 2022.
Calendar Month
Number of Shares Purchased (1)
Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
September 20229,440 $10.15 — $— 
Total9,440 $10.15 — $— 
(1)These common share withholdings and purchases were made to satisfy the tax withholding and payment obligations of certain of our current and former officers and employees of Tremont and/or RMR in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date.
Item 6. Exhibits
Exhibit
Number		 Description
3.1
3.2
4.1
31.1
31.2
31.3
31.4
32.1
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Taxonomy Extension Schema Document. (Filed herewith.)
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
101.LABXBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
101.PREXBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
104Cover Page Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101.)

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEVEN HILLS REALTY TRUST
By:/s/ Thomas J. Lorenzini
Thomas J. Lorenzini
President
Dated: October 26, 2022
By:/s/ Tiffany R. Sy
Tiffany R. Sy
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Dated: October 26, 2022

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