DEF 14A of Seven Hills Realty Trust
Filed Mar 20, 2024 · FY20230001104659-24-036684
Our Board’s Role in Oversight of Risk Management
Tremont and our officers are responsible for incorporating risk management in their activities. Our management and members of our internal audit group meet regularly with our Audit Committee and provide us with advice and assistance with our risk management function. In discharging their oversight responsibilities, our Board and Board committees review regularly a wide range of reports provided to them by Tremont, internal audit and other service providers, including: • reports on market and industry conditions; • operating and regulatory compliance reports; • financial reports; • reports on risk management and our Environmental, Social and Governance (“ESG”) activities and initiatives; • regulatory and legislative updates that may impact us; • reports on the security of our information technology processes and our data; and • legal proceeding updates and reports on other business related matters. Our Board and Board committees discuss these matters among themselves and with representatives of Tremont, The RMR Group LLC (“RMR”), our officers, members of our internal audit group, legal counsel, our independent auditors and other professionals, as appropriate. Our Audit Committee takes a leading role in helping our Board fulfill its responsibilities for oversight of our financial reporting, internal audit function, risk management, including cybersecurity, and our compliance with legal and regulatory requirements. Our Board and Audit Committee review reports annually from our independent auditors regarding potential risks, including risks related to our internal control over financial reporting, and at other times, as may be warranted. Our Audit Committee also annually reviews an internal audit plan developed by members of our internal audit group with the goal of helping us systematically evaluate the effectiveness of our risk management, control and governance processes on an annual basis. Our Audit Committee meets at least quarterly and reports its findings and results of its monitoring activities and oversight on our financial reporting, internal audit function, risk management, including cybersecurity, and our compliance with legal and regulatory requirements, as applicable, to our Board. Our Audit Committee also meets quarterly with members of our internal audit group to review the results of our internal audits and receive reports, and directs or recommends to our Board actions or changes it determines appropriate to enhance or improve the effectiveness of our risk management, including cybersecurity, as it determines appropriate. Our Audit Committee considers risks related to cybersecurity, and receives annual reports from management regarding cybersecurity risks and countermeasures being undertaken or considered by us, including updates on the internal and external cybersecurity landscape and relevant technical developments, and more frequent reports as it may direct or as warranted. RMR has conducted an external assessment of its cybersecurity controls using a qualified third party. In addition, RMR’s cybersecurity program is aligned to the National Institute of Standards and Technology Cybersecurity Framework. RMR conducts annual data security education and testing for its employees, including Tremont employees and RMR employees who provide services to us, in addition to penetration testing and unannounced email phishing exercises. Our Compensation Committee, whose responsibilities are detailed in its charter, among other responsibilities, evaluates the performance of Tremont, our manager, under our business management agreement. Also, our Compensation Committee and our Board consider that we have a share award program that requires share awards to executive officers to vest over a period of years. We believe that the use of share awards vesting over time rather than stock options mitigates the incentives for our management to undertake undue risks and encourages management to make long term and appropriately risk balanced decisions. It is not possible to identify all of the risks that may affect us or to develop processes and controls to eliminate all risks and their possible effects, and processes and controls employed to address risks may be limited in their effectiveness. Moreover, it is necessary for us to bear certain risks to achieve our objectives. As a result of the foregoing and other factors, our ability to manage risk is subject to substantial limitations. To learn more about the risks we face, you can review the matters discussed in Part I, “Item 1A Risk Factors” and “Warning Concerning Forward Looking Statements” in our Annual Report to Shareholders for the fiscal
Fiscal Year 2023 Trustee Compensation
| Name | Fees Earned or Paid in Cash ($)(1) | Stock Awards ($)(2) | All Other Compensation ($) | Total ($) | | Barbara D. Gilmore | 82,500 | 55,260 | — | 137,760 | | Phyllis M. Hollis(3) | 70,000 | 55,260 | — | 125,260 | | Matthew P. Jordan(4) | — | 55,260 | — | 55,260 | | William A Lamkin | 82,500 | 55,260 | — | 137,760 | | Joseph L. Morea | 85,000 | 55,260 | — | 140,260 | | Adam D. Portnoy(4) | — | 55,260 | — | 55,260 | | Jeffrey P. Somers | 87,500 | 55,260 | — | 142,760 |
Summary Compensation Table
Summary Compensation Table
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($)(1) | All Other Compensation ($)(2) | Total ($) | | Thomas J. Lorenzini(3) | 2023 | — | — | 38,325 | 7,531 | 45,856 | | President and Chief Investment Officer | 2022 | — | — | 35,350 | 3,557 | 38,907 | | Fernando Diaz(3)(4) | 2023 | — | — | 10,950 | 2,209 | 13,159 | | Chief Financial Officer and Treasurer | 2022 | — | — | — | — | — | | Tiffany R. Sy(3)(5) | 2023 | — | — | 38,325 | 2,800 | 41,125 | | Former Chief Financial Officer and Treasurer | 2022 | — | — | 10,100 | 950 | 11,050 |
Summary Compensation Table
(1) Represents the grant date fair value of Common Share awards in 2023 and 2022 as applicable, calculated in accordance with ASC 718 (which equals the closing price of the shares on the award date, multiplied by the number of shares subject to the award). No assumptions were used in this calculation. The values listed in this column include the value of the Common Shares we awarded to Mr. Diaz in his capacity as an officer of RMR prior to his becoming our Chief Financial Officer and Treasurer, effective October 1, 2023. (2) Consists of cash distributions in 2023 on unvested Common Shares received in connection with cash distributions we paid to all of our shareholders. (3) In 2023, our named executive officers received aggregate base salary payments of $944,308 and aggregate cash bonuses of $1,045,000 from Tremont or RMR for services those officers provided to Tremont, RMR, our Company and other companies to which Tremont or RMR provide management services. Although some of our named executive officers served as our executive officers for only part of 2023, the cash compensation information described in the preceding sentence includes the cash compensation paid to each named executive officer for the full year. (4) Only one year of information has been provided for Mr. Diaz because he was not a named executive officer prior to 2023. (5) Ms. Sy resigned as our Chief Financial Officer and Treasurer, effective September 30, 2023.
2023 Outstanding Equity Awards at Fiscal Year End
2023 Outstanding Equity Awards at Fiscal Year End The agreements governing the Common Shares we awarded to our named executive officers in 2023 (and prior years) in their capacity as our officers provided that one fifth of each award vested on the date of the award and an additional one fifth vests on each of the next four anniversaries of the award date, subject to the applicable named executive officer continuing to render significant services, whether as an employee or otherwise, to us, RMR, Tremont or any RMR Client or their respective affiliates and to accelerated vesting
2023 Outstanding Equity Awards at Fiscal Year End
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2023 Outstanding Equity Awards at Fiscal Year End
under certain circumstances. Holders of vested and unvested Common Shares awarded under the 2021 Equity Plan receive distributions that we make, if any, on our shares on the same terms as other holders of the Common Shares. The following table shows the total Common Shares awarded by us in 2023 and prior years to our named executive officers that were unvested as of December 31, 2023.
2023 Outstanding Equity Awards at Fiscal Year End
| | | Stock Awards | | | Name | Year Granted | Number of Shares or Units of Stock That Have Not Vested (#)(1) | Market Value of Shares or Units of Stock That Have Not Vested ($)(2) | | Thomas J. Lorenzini | 2023 | 2,800 | 36,232 | | | 2022 | 2,100 | 27,174 | | | 2021 | 1,452 | 18,789 | | Fernando Diaz(3) | 2023 | 800 | 10,352 | | | 2022 | 600 | 7,764 | | | 2021 | 431 | 5,577 | | Tiffany R. Sy(4) | 2023 | 2,800 | 36,232 | | | 2022 | 600 | 7,764 | | | 2021 | 400 | 5,176 |
2023 Outstanding Equity Awards at Fiscal Year End
(1) The number of Common Shares includes shares awarded on September 13, 2023, September 14, 2022 and October 1, 2021, respectively. (2) Equals the number of Common Shares not vested multiplied by the closing price of the Common Shares on December 29, 2023. (3) Mr. Diaz was appointed as Chief Financial Officer and Treasurer effective October 1, 2023. The Common Shares awarded to Mr. Diaz in 2023 and prior years were awarded to him in his capacity as an officer and employee of RMR before becoming an executive officer of our Company. (4) Although Ms. Sy resigned as our executive officer, effective September 30, 2023, pursuant to the terms of her award agreements, her unvested Common Shares remained outstanding because she continued to render significant services to RMR and other RMR Clients. The Common Shares awarded to Ms. Sy in 2021 were awarded to her in her capacity as an officer and employee of RMR before becoming an executive officer of our Company.
Potential Payments upon Termination or Change in Control
Potential Payments upon Termination or Change in Control The 2021 Equity Plan and the form of share award agreement for awards made to our named executive officers provides for acceleration of vesting of all share awards upon the occurrence of certain change in control or termination events (each, a “Termination Event”). The following table describes the potential payments to our named executive officers upon a Termination Event, if such event had occurred, as of December 31, 2023.
Potential Payments upon Termination or Change in Control
| Name | Number of Shares Vested Upon Termination Event (#) | Value Realized on Termination Event as of December 31, 2023 ($)(1) | | Thomas J. Lorenzini | 6,352 | 82,195 | | Fernando Diaz(2) | 1,831 | 23,693 | | Tiffany R. Sy(3) | 3,800 | 49,172 |
Potential Payments upon Termination or Change in Control
(1) Equals the number of unvested Common Shares multiplied by the closing price of the Common Shares on December 29, 2023. (2) Mr. Diaz was appointed as Chief Financial Officer and Treasurer effective October 1, 2023. The Common Shares awarded to Mr. Diaz in 2023 and prior years were awarded to him in his capacity as an officer and employee of RMR prior to becoming an executive officer of our Company. (3) This amount includes 400 Common Shares awarded to Ms. Sy in her capacity as an officer and employee of RMR prior to becoming an executive officer of our Company. Although we have no formal policy, plan or arrangement for payments to employees of Tremont or RMR in connection with the termination of their employment with Tremont or RMR, we may in the future provide on a discretionary basis for the acceleration of vesting of Common Shares previously awarded to them under the 2021 Equity Plan depending on various factors we then consider relevant and if we believe it is in our best interests to do so.
Potential Payments upon Termination or Change in Control
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Potential Payments upon Termination or Change in Control
For a discussion of the consequences of a Change in Control or Termination Event under our business management agreement with Tremont and RMR, see the “Certain Related Person Transactions” section.
Pay Versus Performance
Pay Versus Performance The following table and footnotes summarize the total compensation we paid to our named executive officers (our “NEOs”), compensation “actually paid” to our NEOs (calculated in accordance with SEC rules), the cumulative total shareholder return of the Company and our net income for the past three fiscal years. None of our NEOs is employed by us. Tremont, a subsidiary of RMR, provides, or arranges with RMR to provide, services that otherwise would be provided by employees and either RMR or Tremont employs and compensates our NEOs directly and in their sole discretion in connection with their services rendered to Tremont, RMR, to us and other companies to which RMR or Tremont provide management services. For information regarding the compensation paid by us to Tremont and RMR, please see the below “Certain Related Person Transactions” section. We do not pay our NEOs salaries or bonuses or provide other cash compensation or employee benefits. We provide equity incentive compensation to our NEOs pursuant to the terms of our 2021 Equity Plan.
Pay Versus Performance
Pay Versus Performance
Pay Versus Performance
| Year | Summary Compensation Table Total for Principal Executive Officer (“PEO”) | Compensation Actually Paid to PEO(1) | Average Summary Compensation Table Total for Non-PEO NEOs | Average Compensation Actually Paid to Non-PEO NEOs(2)(3) | Value of initial fixed $100 Investment Based on Total Shareholder Return* | Net Income ($000s) | | 2023 | $45,856 | $67,918 | $27,142 | $35,441 | $161.46 | $25,965 | | 2022 | 38,907 | 32,294 | 8,192 | 4,453 | 99.58 | 27,640 | | 2021 | 36,425 | 39,029 | 36,435 | 68,487 | 103.44 | 24,650 |
Pay Versus Performance
* The cumulative total shareholder return (“TSR”) for 2021 is based on the period from January 5, 2021 through December 31, 2021, and the three year cumulative TSR for 2023 is based on the period from January 5, 2021 through December 31, 2023. On January 5, 2021, we ceased to be a registered investment company under the Investment Company Act of 1940 (the “1940 Act”), as amended. Since that deregistration, we fully implemented the change in our business mandate that our shareholders had approved in April 2020 to focus primarily on originating and investing in first mortgage whole loans secured by middle market and transitional CRE. Accordingly, we have not included the time period prior to that deregistration in the calculation of TSR. (1) The following table summarizes the applicable deductions and additions for the PEO in the calculation of Compensation Actually Paid to the PEO.
PEO Compensation Actually Paid
PEO Compensation Actually Paid
PEO Compensation Actually Paid
| Year | PEO Name | Total Compensation Per Summary Compensation Table Less Stock Grant Amount | Year End Fair Value of Equity Awards Granted and Unvested During Applicable Year | Change in Fair Value as of Year End of Any Prior Year Awards that Remain Unvested as of Year End | Awards Granted and Vested in the Same Year, at Fair Value as of the Vesting Date | Change in Fair Value as of Year End of Any Prior Year Awards that Vested During Applicable Year | Total Equity Value Reflected in Compensation Actually Paid | Compensation Actually Paid to PEO | | 2023 | Thomas Lorenzini | $7,531 | $36,232 | $13,675 | $7,665 | $2,815 | $60,387 | $67,918 |
PEO Compensation Actually Paid
(2) The only non-PEO NEOs for 2023 are Fernando Diaz and Tiffany R. Sy. (3) The following table summarizes the applicable deductions and additions for each of the Non-PEO NEOs in the calculation of Compensation Actually Paid to each Non-PEO NEO.
Average Non-PEO NEOs—Compensation Actually Paid
Average Non-PEO NEOs—Compensation Actually Paid
Average Non-PEO NEOs—Compensation Actually Paid
| Year | Total Compensation Per Summary Compensation Table Less Stock Grant Amount | Year End Fair Value of Equity Awards Granted and Unvested During Applicable Year | Change in Fair Value as of Year End of Any Prior Year Awards that Remain Unvested as of Year End | Awards Granted and Vested in the Same Year, at Fair Value as of the Vesting Date | Change in Fair Value as of Year End of Any Prior Year Awards that Vested During Applicable Year | Total Equity Value Reflected in Compensation Actually Paid | Compensation Actually Paid to Non-PEO NEOs | | 2023 | $2,504 | $23,292 | $3,910 | $4,928 | $807 | $32,937 | $35,441 |
Average Non-PEO NEOs—Compensation Actually Paid
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