Seven Hills Realty Trust (SEVN) risk factors, FY2024 10-K

Risks Relating to Our Business

1. 01We operate in a highly competitive market for investment opportunities and competition may limit our ability to originate or acquire target investments on attractive terms or at all
2. 02Unfavorable market, economic, CRE and capital market conditions may have a material adverse effect on our investment returns, ability to grow our investment portfolio, results of operations, financial condition and ability to pay distributions to our shareholders
3. 03We have a limited operating history investing in mortgage loans and have made a limited number of target investments to date
4. 04Our loan portfolio consists of a limited number of investments, and losses, repayments or other changes with respect to any of those investments may significantly impact us
5. 05The lack of liquidity of our loan investments may adversely affect our business
6. 06Loans secured by properties in transition or requiring significant renovation involve a greater risk of loss than loans secured by stabilized properties
7. 07Tremont’s diligence process for investment opportunities may not reveal all facts that may be relevant for an investment, and if we incorrectly evaluate the risks of our investments, we may experience losses
8. 08We may be unable to obtain additional capital sufficient to enable us to grow our loan portfolio
9. 09Prepayment rates may adversely affect our ability to generate returns, which could negatively impact our ability to make or sustain distributions to our shareholders
10. 10Difficulty or delays in redeploying the proceeds from repayments of our existing loan investments may cause our financial performance and returns to shareholders to decline
11. 11Earning returns on the CRE loans that we originate or acquire is subject to the ability of the property owner to generate net operating income from operating the property
12. 12We may need to foreclose on loans that are in default, which could result in losses
13. 13The CRE loans that we originate or acquire expose us to risks associated with real estate investments generally
14. 14We are subject to various risks related to the ownership of certain real property
15. 15REIT distribution requirements may adversely impact our ability to carry out our business plan
16. 16Changes in interest rates and credit spreads may significantly reduce our revenues or impede our growth
17. 17Third party expectations relating to ESG factors may impose additional costs and expose us to new risks
18. 18We, our borrowers and their tenants are subject to risks from adverse weather, natural disasters and climate events, and costs associated with future legislation designed to address climate change could increase our, our borrowers’ and their tenants’ costs
19. 19We and Tremont are subject to state licensing requirements and our or Tremont’s failure to be properly licensed may have a material adverse effect on our operations
20. 20There is no guarantee that we or Tremont will be able to obtain these licenses, and efforts to obtain and maintain such licenses may cause us to incur significant expenses. Any failure to be properly licensed under state law or otherwise may have a material adverse effect on us and our operations
21. 21We may be subject to lender liability claims and, if we are held liable under such claims, we could be subject to losses
22. 22Insurance proceeds with respect to a property may not cover all losses, which could result in the corresponding non-performance of or loss on our investment related to such property
23. 23Liability relating to environmental matters may adversely impact the value of our investments
24. 24We may not have control over certain of our investments
25. 25RMR and Tremont rely on information technology and systems in their respective operations, and any material failure, inadequacy, interruption or security breach of that technology or those systems could materially and adversely affect us

Risks Relating to Our Financing

1. 26We have debt and expect to incur additional debt, and our governing documents contain no limit on the amount of debt we may incur
2. 27The duration of our debt leverage and our investments may not match
3. 28Our Secured Financing Facilities require us to comply with restrictive covenants and any future financings may require us to comply with similar or more restrictive covenants
4. 29Our Secured Financing Facilities require, and the agreements governing any additional repurchase or bank credit facilities or debt arrangements that we may enter into may require, us to provide additional collateral or pay down debt
5. 30Any default in a repurchase agreement may cause us to experience a loss

Risks Relating to Our Relationships with Tremont and RMR

1. 31We are dependent upon Tremont and its personnel. We may be unable to find suitable replacements if our management agreement is terminated
2. 32Tremont has broad discretion in operating our day to day business
3. 33Our management structure and agreements and relationships with Tremont and RMR and RMR’s and its controlling shareholder’s relationships with others may create conflicts of interest, or the perception of such conflicts, and may restrict our investment activities
4. 34Our management agreement’s fee and expense structure may not create proper incentives for Tremont
5. 35Our management agreement is between related parties and its terms may be less favorable to us than if they had been negotiated on an arm’s length basis with an unrelated party
6. 36Terminating our management agreement without a cause event may be difficult and will require our payment of a substantial termination fee
7. 37Tremont does not guaranty our performance; moreover, we could experience poor performance or losses for which Tremont would not be liable. Tremont’s liability is limited under our management agreement, and we have agreed to indemnify Tremont against certain liabilities
8. 38Tremont may change its processes for identifying, evaluating and managing investments and the personnel performing those functions for us without our or our shareholders’ consent at any time
9. 39Our management agreement permits our Trustees and officers, Tremont and its affiliates, including RMR, and their respective directors, trustees, officers, agents and employees to retain business opportunities for their own benefit and to compete with us
10. 40Disputes with Tremont may be referred to binding arbitration, which follow different procedures from in-court litigation and may be more restrictive to shareholders asserting claims than in-court litigation
11. 41We may be at an increased risk for dissident shareholder activities and shareholder litigation due to perceived conflicts of interest arising from our management structure and relationships
12. 42Tremont is subject to extensive regulation as an investment adviser, which could adversely affect its ability to manage our business

Risks Relating to Our Organization and Structure

1. 43Ownership limitations and certain provisions in our declaration of trust and bylaws, as well as certain provisions of Maryland law, may deter, delay or prevent a change in our control or unsolicited acquisition proposals
2. 44Our rights and the rights of our shareholders to take action against our Trustees and officers are limited
3. 45We may change our operational, financing and investment policies without shareholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations
4. 46Our intention to remain exempt from registration under the 1940 Act imposes limits on our operations
5. 47The SEC has not published guidance with respect to the treatment of CMBS for purposes of the Section 3(c)(5)(C) exemption. Unless we receive further guidance from the SEC or its staff with respect to CMBS, we intend to treat CMBS as a real estate related asset

Risks Relating to Our Taxation

1. 48Our failure to remain qualified for taxation as a REIT under the IRC could have significant adverse consequences
2. 49Foreclosures may impact our ability to qualify as a REIT and minimize tax liabilities
3. 50REIT distribution requirements could adversely affect us and our shareholders
4. 51We may in the future choose to pay dividends in our common shares, in which case shareholders may be required to pay income taxes in excess of the cash dividends that they receive
5. 52Distributions to shareholders generally will not qualify for reduced tax rates applicable to “qualified dividends.”
6. 53Even if we remain qualified for taxation as a REIT under the IRC, we may face other tax liabilities that reduce our cash flow
7. 54The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to remain qualified for taxation as a REIT under the IRC
8. 55We may fail to remain qualified for taxation as a REIT under the IRC if the IRS successfully challenges the treatment of our mezzanine loans as debt for federal income tax purposes or successfully challenges the treatment of our preferred equity investments as equity for federal income tax purposes
9. 56The failure of assets subject to our secured financing agreements to qualify as real estate assets could adversely affect our ability to remain qualified for taxation as a REIT under the IRC
10. 57Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities
11. 58We may be required to report taxable income from particular investments in excess of the economic income we ultimately realize from them
12. 59If we own assets or conduct operations that generate “excess inclusion income” outside of a TRS, doing so could adversely affect shareholders’ taxation and could cause our common shares to become ineligible for inclusion in leading market indexes
13. 60The tax on prohibited transactions limits our ability to engage in transactions, including some methods of securitizing mortgage loans that would be treated as sales for U.S. federal income tax purposes
14. 61We may incur adverse tax consequences as a result of our acquisition of TRMT

Risks Relating to Our Securities

1. 62Our distributions to our shareholders may be reduced or eliminated and the form of payment could change
2. 63For these reasons, among others, our distribution rate may decline, or we may cease paying distributions to our shareholders
3. 64Changes in market conditions could adversely affect the market value of our securities